I have a call schedule later today with Dow folks and will hopefully have more. The question Kuwait has to ask itself now is, “Who in their right mind will commit to a deal with us now?”……Do they think they are the only country with oil fields?
Here is the news:
Now Dow’s dividend is being called into question:
The possible effect on the Rohm & Hass (ROH) deal
Kuwait needs to look past today. This was the first mega scale JV in the country and based on current actions, may be the last for a while. Let’s not forget Dow currently has JV’s in Saudi Arabia, Russia, South America and China proceeding without delay or problems. The Saudi deal at Ras Tanura is nearing first stage completion. Does anyone really think Dow CEO Andrew Liveris has not picked up the phone and called them or even Dubia to inquire about another partnership?
Let’s move outside of Dow. If you were GE (GE) or another oil or chemical major, how eager are you now to call Kuwait to form any type of partnership? Kuwait does not seem to understand they do not have all the oil, they do not have the technical expertise they would have received from Dow.
The dividend…………it is Liveris’s words now. It cannot be cut. He has staked his reputation and word on its safety.
Rohm & Hass (ROH). Liveris has spent the last few years fixing Dow’s balance sheet. I’m not convinced to advantages of buying Rohm at these prices justifies the damage that would be done to it now without the Kuwait money. Let’s be honest, nobody in their right mind is going to buy Rohm at these prices anytime soon (2 years) anyway. That is a tactic that can be used to lower the price. If Dow walks away and pays the $750 million breakup fee, that comes to 5% of the deal price. If Rohm goes back on the market, they will be lucky to get the 40% discount the shares are currently trading at to the deal price.
If Dow walks, Rohm shareholders suffer far more that Dow’s do. I think it is safe to say the current depressed Dow share price reflects the pessimism over the deal today, getting rid of the deal ought to boost share price.
As bad as it does seem, Dow does have some leverage. Rohm needs the deal currently more than Dow does. Dow could also do considerable damage to Kuwait’s reputation in the business community should it choose to fight for the $2.5 billion breakup fee as in a court hearing, all internal communications will become public and the meaningless assurances from Kuwait will be known to all. I’m not sure Kuwait really understands how much trust is involved in business and without it, how difficult it will become to do future deals.
The best thing for all parties is for both deals to get done in some form…
Disclosure (“none” means no position):
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13 replies on “Thoughts on Kuwait Reneging on Dow Chemical JV”
Todd,
From what I remember there is no provision in the DOW – ROH deal about a break up fee. Infact if DOW does not close the deal by Jan 10, the cost increases everyday.
Gaurav
Gaurav, that is my understanding too
here guys
http://www.sec.gov/Archives/edgar/data/29915/000094787108000395/ss41835_8k.htm
page 2
Todd,
Thanks for the link. But if you notice there is no financing or material change clause which would trigger the breakup fee. I understand that there is confidential agreement which might contain some other provision to trigger the breakup fee but when I consider that ROH people been making statements about the deal going through and no clarity from DOW I am leaning towards thinking that there is not much leverage that DOW has to force ROH to renegotiate. I am sure DOW is trying to convince ROH to renegotiate but it does not have much leverage.
Thoughts?
Gaurav
the deal is contingent on financing…all dow has to do i ask one of the banks to back out….i believe the banks would gladly do it at this point given their situation
there is always a way out….witness apollo / huntsman
Regulatory approval could trigger it? Could not open the link
Matias, regulatory non-approval should trigger it.
Quote from link
Consummation of the Merger is subject to customary closing conditions, including (i) the approval of Rohm and Haas’ shareholders, (ii) expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iii) issuance by the European Commission of a decision under Council Regulation (EC) No. 139/2004 of 20 January 2004 on the control of concentrations between undertakings (published in the Official Journal of the European Union on January 29, 2004 at L 24/1) declaring the Merger compatible with the common market, (iv) subject to certain exceptions, the expiration or termination of certain foreign regulatory waiting periods and the receipt of certain foreign regulatory clearances, and (v) subject to certain exceptions, the accuracy of the representations and warranties and compliance with the covenants of each party. Consummation of the Merger is not conditioned upon the receipt by the Company of financing.
The last sentence says that merger is not conditioned on receipt of financing… now I am confused.
Apollo 1B USD on the hook and other 1B USD potential loss, months of messy litigations and reputation destruction.
Besides is not like the banks could argue, like in Huntsman, the financial solvency of the company.
Disclosure, bought ROH this morning
DOW can walk away from ROH for the same reason Kuwait did…the economic facts on the ground changed completely. It’s too bad they all didn’t sit together and renegotiate based on today’s prices.
Could the banks yank the bridge loan as debt to equity may be too high and trigger covenants?
if that happens, dow could argue material change in that they simply do not have the $$ then..
why have the breakup fee then?
nick,
I would say dow is quiet because it is looking at 2 deals at the same time and does not want to say anything until it has something concrete to say or do,,
any of u done a valuation of dow based on net asset value? my conservative discounted fcf model comes up with $19.50, but i’m looking for further support before entering. i see tbv as of last b sheet was $15.89.