This is about as transparent as it gets…But, it could lead to something..
The Kuwait Investment Authority would consider increasing its support for Dow Chemical’s (DOW) disputed takeover of Rohm and Haas (ROH) if the terms of the deal were changed to account for the downturn, a person familiar with the matter says.
Dow failed to complete the $15bn (€11.5bn) deal after the collapse of a joint venture between Dow and PIC – an arm of the Kuwaiti Petroleum Corporation – that was supposed to contribute $7.5bn to help pay for the acquisition. Warren Buffett has agreed to contribute $3bn and the KIA was to have added $1bn. According to a person with direct knowledge of the matter, the KIA would consider putting up more money if there were new terms.
“Today, it is very difficult to complete this deal on the old terms,” this person added. “There would have to be a new price and new terms. The environment has changed so much and chemical companies are losing so much money.”
Rohm and Haas underlined the brutal conditions faced by the sector, reporting an 81 per cent fall in fourth quarter earnings from continuing operations.
The figures make it harder for Dow to justify paying its original price for the company. Rohm shares fell more than 1 per cent to $55.70 at midday in New York, well below the $78 per share Dow agreed to pay last year.
The KIA had not approached Dow to discuss increasing its investment in the deal, Dow said. It is also highly unlikely that KIA on its own would put in anything like the $7bn to $8bn Dow would need to close the Rohm deal.
However, an increased investment by the KIA strikes many analysts as an elegant solution to the break-up of the Dow-PIC joint venture.
“There is a concern as to Kuwait’s reputation for direct foreign investment,” says Ahmed Barakat, managing partner with Al-Sarraf & Al-Ruwayeh in Kuwait City who is not directly involved in the matter. “KIA could salvage that reputation.”
Initial talks between the Kuwaitis and Dow began in 2007. In November 2008, the deal was renegotiated to reduce the Kuwaiti contribution to $7.5bn from $9bn in recognition of the deterioration in the economy.
Even the revised terms, however, met with criticism in the Kuwaiti parliament, where questions were raised about the price tag and a $2.5bn break-up fee.
Dow has until July to take advantage of its one-year bridge loan for the deal. It reported a $1.55bn fourth quarter loss.
What do we really have? Kuwait has finally realized the obvious to everyone else. They have done irreparable harm to their reputation as a business partner. At all cost, they want to avoid the coming legal confrontation with Dow. Why? Discovery will lead to disclosure on internal communication with Dow and their deception will be laid bare for the world to see.
Recent accusation from Kuwait of bribery from Dow officials and “reviewing” other upcoming ventures only served to further cast doubt on the country as a business partner in the international community.
This “offer to help” is an olive branch to Dow. What will happen is Kuwait will commit more funding for the Rohm deal and in return, Dow will drop its seeking $2.5 billion in damages. Despite what Kuwait has done, they are still a valuable partner for Dow although Kuwait must now see that Dow does have options as it has been confirmed they are talking to Sabic (Saudi Basic Industies) to purchase to commodity businesses Kuwait had been scheduled to buy. One must come to the conclusion the Kuwaiti’s thought they were the only dance partner Dow had.
Dow dropping the lawsuit lets Kuwait off the hook and clears the way for future collaborations, a positive for both parties.
Like I have said all along, this will all get worked out…in due time…
Disclosure (“none” means no position):Long DOW. none
Visit the ValuePlays Bookstore for Great Investing Books