This is a short term arb play.
Dow Chemical will purchase Rohm & Haas (ROH) for $78 a share and the deal will close in early 2009.
Berkshire Hathaway (BRK.A) is investing $3b in the deal and it is an all-cash transaction. Currently shares trade at $70 a share under the current credit environment. Purchasers of shares today will get a 10% 4 month return (30% annualized). Downside is minimal.
What could go wrong?
Kuwait, who is buying 1/2 Dow’s commodity business for $9.5b could back out of the deal. That cash is being used for funding the ROH transaction. How likely is this? Well, when one considers that the newly formed JV is in the process of hiring personnel and setting up shop in Michigan, not very.
Berkshire could back out. Again, can anyone come up with a scenario when this has happened? Me either.
Since no debt is being used for the transaction and Dow has already received the bridge loan necessary to complete it, credit market conditions are irrelevant here.
Why did the price fall? Simple. During mass sell-offs like we have had, everything falls, whether is should or not. That gives us tremendous opportunity for very safe situational investing. What this trade is essentially is a way to park some money for 4 months with a very high probability of a 10% payoff with very little downside risk (not none, but very little).
The deals today that are at risk are the ones that depend on bank’s lending for the financing, looks for the all cash or all stock ones.
Disclosure (“none” means no position):Long Dow, none
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4 replies on “Buying Rohm & Haas”
the downside is not minimum. ROH can fall to pre takeover levels of low 50s so the downside is some 25%.
another risk MAC clauses, have you reviewed these in the purchase agreement? What recourse does Dow has in this case. buffett is protected here but as an Arb you are not.
what is the probability of closing? close to 90%? given downside of 25% and upside of 10%
then your expected payoff is 6.5% (19% annualized) does not meet the 20% hurdle rate for arbitrage operation. not bad in this environment.
the deal will close, given the players involved, but I think you are overestimating the expected returns.
Sami,
RAR means nothing here as the closing is all but assured. it is not a stock involved deal nor are there any financing issues.
the pure return is the difference between $70 and $78..
even is your example it comes to 19.5% annual…can’t sneeze at that in this environment.
An interesting article on SeekingAlpha regarding this subject. The author suggests a 17% chance that the deal will not close. His concern is not Buffet, or the Kuwaiti Investment Group….. But the financing is partly arranged through Citi, Morgan Stanley and Merrill… There are also regulatory hurdles. There are other comments from the CEOs and links…. The article can be read here:
http://seekingalpha.com/article/98661-irrational-arbitrage-spread-dow-chemical-s-acquisition-of-rohm-haas
By the way the ImBev takeover of BUD still seems on track and the upside is still about 10%. And the deal should close late November. BUD gained a few bucks today, but looks like it might roll over and retest $59. Sale is supposed to close at $70.
jegan
jeagan,
the merrill / citi financing is not for the transaction. it is simply a bridge loan that will be repaid when the kuwait / berkshire deals close.
it has already been issued so there is no issue to it.
the regulatory issues are non existent also as far as their closing the deal. it may involve a small divestiture but that is all.
i would be more worried about imbev as there are 51 lenders involved.