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Dow, Rohm And Haas Settle

Revised terms pave the way for Dow's big specialty chemical acquisition

by Alexander H. Tullo
March 16, 2009 | A version of this story appeared in Volume 87, Issue 11

Credit: Rohm And Haas
Dow's purchase of Rohm and Haas comes with this new R&D center in Shanghai.
Credit: Rohm And Haas
Dow's purchase of Rohm and Haas comes with this new R&D center in Shanghai.

DOW CHEMICAL and Rohm and Haas have struck a $19 billion, 11th-hour agreement that Dow says will let it take over the Philadelphia-based company without ruining its balance sheet. But to make ends meet, Dow will need to make painful cuts in jobs and operations.

The deal is still for $78 per share, plus fees for Dow's delays. To reduce the debt that Dow must take on, Rohm and Haas's two largest shareholders, the Haas Family Trusts and Paulson & Co., will buy $2.5 billion in preferred Dow shares. Dow also has the option of having the Haas Family Trusts purchase $500 million in its common shares. And as in the original transaction, Berkshire Hathaway and the Kuwait Investment Authority will contribute $3 billion and $1 billion, respectively.

The Kuwaiti government thrust Dow into a crisis in late December when it forced Petrochemical Industries Co. of Kuwait to back out of its deal to purchase half of Dow's commodity chemicals business. That transaction would have provided Dow with $9 billion pretax to help pay for Rohm and Haas.

Credit rating agencies subsequently threatened to cut Dow's ratings to below investment grade if it proceeded with the Rohm and Haas deal, in part because Dow had taken out a bridge loan that needed to be paid back by April 2010. Dow refused to close by the January deadline. Rohm and Haas sued.

On Monday, March 9, as the suit was about to go to trial, the two firms reached an agreement. "We always said Rohm and Haas was a strategic fit for Dow and that we needed more time to find a solution for the combined entities to be viable in today's treacherous market environment," Dow CEO Andrew N. Liveris told analysts after the deal was announced.

To help make ends meet, Dow is planning 3,500 layoffs, mostly of Rohm and Haas employees, in addition to the 5,000 it announced in December and the 1,500 that Rohm and Haas had been planning. It is also closing 24 offices, six R&D locations, and 10 to 15 plants. Dow says the moves will help it save about $1.3 billion annually.

Dow says it will also sell some $4 billion in businesses to help finance the transaction. It is negotiating to sell its stake in a European refining joint venture with Total. It plans to sell Rohm and Haas's Morton Salt unit. And it is negotiating to sell its stake in a Southeast Asian petrochemical business.

Liveris noted that Dow plans other smaller divestitures. He also disclosed that the firm has narrowed down new suitors for its commodity chemicals business to two state-owned oil and gas firms. The company also got a one-year extension and loosened up other terms on its bridge loan.

John E. Roberts, a stock analyst with Buckingham Research, told clients that he doesn't think Dow is a bankruptcy risk in the near term. If it were, he says, Dow would have gone to court rather than having settled, investors would not have bought Dow securities, and banks would not have refinanced the bridge loan. "We believe Dow likely remains investment grade," he wrote.


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