Dow Responds To Rohm And Haas

Dow Chemical has responded to Rohm and Haas's lawsuit over its failure to complete the purchase of the company for $18.8 billion. It argues that the combined company would struggle for survival now that its K-Dow joint venture with Petrochemical Industries Co. of Kuwait has fallen through.

At the core of Dow's argument, filed with the Delaware Court of Chancery, is the $13 billion bridge loan Dow secured to facilitate the deal. Rohm and Haas maintains that this loan, plus $4 billion in financing from Berkshire Hathaway and others, is well above what Dow needs to complete the acquisition.

Dow counters that the loan, which needs to be repaid by April 2010, was never intended to be the primary financing for the merger. "Rather, the bulk of the bridge loan was put in place as a short-term backstop in the event that the Rohm and Haas closing occurred before the K-Dow joint venture closed," Dow's lawyers write. The K-Dow deal, which would have brought Dow $9 billion pretax, fell apart in late December, days before its anticipated completion.

And Dow says the bridge loan would put the combined company at risk. Standard & Poor's and Moody's have signaled they would lower Dow's credit rating should the deal proceed. This downgrade, Dow argues, would trigger a covenant requiring Dow to maintain a certain ratio of debt to profits. Given the current economic climate, default would be likely, Dow says.

Rohm and Haas contends that Dow can improve its financial profile. It says Dow should virtually eliminate its dividend, which the company has dutifully paid out since 1912. It also says Dow should sell off businesses after the merger is completed and pursue more financing options.