Tag: dow

Less than a month ago Dow Chemical (DOW) was begging Rohm & Haas (ROH) to come to the bargaining table. Now, after a new agreement with their lenders and some chiding from the judge, they are essentially telling Rohm, “give the deal we want or we’ll see you in court”.

Reuters Reports:

Dow Chemical Co (DOW.N) said on Sunday that settlement talks with Rohm and Haas Co (ROH.N) were going “quite well” on the eve of a scheduled court hearing on their soured $15 billion merger. Unless a settlement is reached, Dow and Rohm and Haas are set to face off on Monday in Delaware court over Dow’s refusal to close its more than $15 billion takeover of Rohm and Haas.

A spokesman for Dow said it was looking for the “right deal,” but a takeover of Rohm and Haas at $78 per share in cash was not acceptable. Unless Dow gets the right deal, it said it would proceed with the court hearing. Dow said it was important that it protected its investment-grade rating.

Dow said it would have more to disclose on Monday. Rohm and Haas could not be immediately reached for comment.

Notice the change? Dow has taken Rohm’s arguments off the table and the judge has made it clear that he will weight the interests of the near 60,000 employees the combined entity would have vs the interest of the 3 shareholder groups who stand to benefit the most should the merger be forced immediately. One can’t help but think it was a less than subtle way of saying “get to the table”.

Recent actions have Dow making concessions and working with its bankers. Here is the rub for Rohm. The whole deal is contingent on Dow extending is loans with the bank an additional year. The banks agreed to do that only if Dow maintains its credit rating. Forcing the deal now would cause them to lose that and the whole deal would end up costing jobs…lots of them, a scenario the judge has already alluded to wanting to avoid.

It is the banks who are now forcing the hands of Rohm. Expect concessions on the part of them,,,

Disclosure (“none” means no position):Long DOW

Visit the ValuePlays Bookstore for Great Investing Books

Dow Chemical (DOW) and Rohm & Haas (ROH) have confirmed they are back at the bargaining table. To accentuate the “a deal is close” scenario, Dow announced in an 8K filing that they have renegotiated their loans with the syndicate and the key point is that the loan can be extended for an additional year under certain conditions.

From the 8K

On September 8, 2008, The Dow Chemical Company (the “Company”), as borrower, entered into a Term Loan Agreement (the “Original Agreement”) with the lenders party thereto and Citibank, N.A., as administrative agent for the lenders, in order to partially finance the acquisition by the Company (the “Acquisition”) of Rohm and Haas Company (the “Target”), to retire certain debt of the Target and to pay related costs and expenses. On March 5, 2009, the parties to the Original Agreement entered into a First Amendment to Term Loan Agreement (the “First Amendment”) in order to amend the Original Agreement (as so amended, the “Loan Agreement”).

Under the Loan Agreement, the lenders have committed to lend to the Company an aggregate principal amount that will not exceed the sum of each of their commitments, the total amount of which was reduced by $500,000,000 to $12,500,000,000 pursuant to the First Amendment, in a single term borrowing on the date of the closing of the Acquisition. The Loan Agreement will mature on the earlier of (a) the first anniversary of the closing date and (b) April 14, 2010; provided, however, that the original maturity date of the Loan Agreement may be extended to the date occurring one year following the original maturity date, at the option of the Company, subject to the satisfaction of certain conditions precedent, including (i) the absence, since December 31, 2008, of a material adverse change in the financial position or operations of the Company and its consolidated subsidiaries, considered as a whole (except for the Acquisition and the financing thereof and except for any changes disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008; provided that any changes or developments relating to matters so disclosed (and the effects thereof) that arise after December 31, 2008 may be taken into account in determining whether a material adverse change has occurred), (ii) compliance with the total leverage ratio covenant described below as of the original maturity date, if such covenant is applicable on such date, (iii) the reduction of the aggregate principal amount of the loans under the Loan Agreement to $8,000,000,000 or less, and (iv) the payment of an extension fee equal to 2% of the aggregate principal amount of the outstanding loans after giving effect to the extension.

The Loan Agreement permits loans bearing interest at a rate per annum equal to either the prime rate or LIBOR plus, in each case, a margin that varies based on the Company’s credit rating (the “Applicable Margin”); provided, however, that if the original maturity date of the Loan Agreement is extended as described in the preceding paragraph, then the Applicable Margin shall increase, as set forth in the Loan Agreement, on the date of extension, on the 90th day following such date and on each successive 90th day thereafter.

The Company has agreed to pay to the lenders a structuring fee equal to 1.25% of the aggregate amount of the lenders’ commitments. Additionally, under the Loan Agreement, the Company is obligated from time to time to pay certain duration fees to the lenders, as set forth in the Loan Agreement. Higher rates will apply to certain of these fees (i) unless, on or prior to the 90th day following the date of the closing of the Acquisition, the Company consummates one or more sales of certain equity interests or equity-linked securities for which it receives aggregate gross cash proceeds of at least $1,500,000,000 (calculated, in the case of equity-linked securities, based on the amount of “equity credit” accorded thereto by certain rating agencies) (a “New Equity Issuance”) or (ii) if a New Equity Issuance does occur on or prior to such 90th day following the date of the closing of the Acquisition, but the outstanding indebtedness under the Loan Agreement has not been reduced to the extent specified under the Loan Agreement.

I would still be very surprised if this went to trial. The benefit of the deal to the 3 principle shareholders of Rohm and Haas will not, under any circumstances win out over the potential job losses in this economy a forced merger would likely cause.

That is why Rohm is back at the table. Now the key is the loan extension. Dow can extend the $12.5 billion loan an additional year provided the keep their credit rating investment grade. Forcing the merger now under the original terms would void that. Also, Dow has cut the dividend and said it will raise another $3 billion through debt sales. In short they have taken away any argument Rohm has claiming Dow has not sought alternative avenues in which to complete the deal. They clearly have.

Yes I know Rohm has an “iron clad” agreement. But, in a Delaware Court the Judge decides what is “equitable” or “fair” for both parties. He is required to find a solution that is “best for all parties”, employees included. He has already told Dow and Rohm to “find a business solution” more than once. That translates to: “Dow, you are going to do this deal” and “Rohm, it won’t be now or under the original terms”.

This is why Rohm has decided to talk, even they now realize the outcome they face in court in far less favorable than it was a month ago.

Disclosure (“none” means no position):Long DOW

Visit the ValuePlays Bookstore for Great Investing Books

Dow Chemical (DOW) won a ruling in court Friday vs Rohm & Haas (ROH).

Dow Chemical / Rohm & Haas Depositions

My take on this is Dow will attempt to get the founding family on record saying they wished for the combined entity to survive. If Dow can then cast doubt on that should the merger be forced immediately, then they now have a huge continent of shareholders in essence wanting the merger to be delayed (not canceled).

Either way, it will be interesting..

Disclosure (“none” means no position):Long DOW

Visit the ValuePlays Bookstore for Great Investing Books

When I first read this press release, I was left wondering what I was missing. How could Hotchkis & Wiley, as a Dow shareholder as intimated in this letter want a merger now? So I did some digging and guess what I found?

Here is the press release:

LOS ANGELES–(BUSINESS WIRE)–Hotchkis and Wiley Capital Management
today announced the firm has contacted Rohm and Haas Company (NYSE:ROH –
News) to express support for the closing of the acquisition of Rohm and
Haas by The Dow Chemical Company (NYSE: DOW – News) under the
contractual terms of a definitive agreement entered by Dow and Rohm and
Haas on July 10, 2008.
A large shareholder of Rohm and Haas, Hotchkis and Wiley addressed CEO
and chairman Rajiv Gupta in the following letter today:

Mr. Rajiv L Gupta
CEO and Chairman of the Board
Rohm and Haas Company
100 Independence Mall West
Philadelphia, PA 19106

Dear Mr. Gupta,

We are writing to express Hotchkis and Wiley’s support for your efforts
to close the Dow Chemical transaction on its contractual terms. As a
recent top ten shareholder of Dow Chemical and current large shareholder
of Rohm and Haas, we are intimately familiar with the assets of both
companies. Additionally, we have undertaken a thorough analysis of the
merger agreement and Dow Chemical’s ability to finance this transaction.

Regarding the merger agreement, our conclusion is that specific
performance is warranted. We view the contract as strong and unlikely to
be improved. It is our view that Dow Chemical should honor their
commitment. However, in the event that the agreement continues to be
breached, we want to affirm your resolve to seek specific performance
along the original terms laid out in the contract. Any change to the
original contract would merely expose shareholders of Rohm and Haas to
unnecessary risks.

Dow has a variety of options available to honor the agreement on its
original terms. These options include drawing down the bridge loan,
divesting certain assets, obtaining long-term debt financing and issuing
equity. While the current financial crisis has made financing terms less
favorable than they have been in the past, options are nevertheless
available. Any one or combination of these options would provide the
capital needed to close the transaction.

The most obvious solution for Dow Chemical is to undertake an equity
offering. This option has been available to Dow since the signing of the
agreement and continues to be available today. We believe that the
current uncertainty regarding the transaction has obscured the value of
the combined entity. We have expressed to Dow Chemical our interest in
participating in an equity offering to accommodate the transaction.

Hotchkis and Wiley has a 28 year history of investing in US equity
markets. As of December 31, 2008, we managed $10.8 billion in client
assets. We look forward to being of any help possible. Please contact me
with any questions or follow up discussion.

Sincerely,
Stan Majcher
Principal and Portfolio Manager

One problem, Hotchkis and Wiley Capital Management is no longer a shareholder in Dow chemical acording to theirrecent 13H-R SEC filing.

At no time does Hotchkiss admit they no longer are Dow shareholders. Isn’t this is violation of some SEC disclosure law? Sure they say “recent top ten holder” but at no point do they admit they are “no longer a shareholder”. One could assume they were a recent top ten holder and now own a lesser percentage or recently became a top ten holder. It is open to interpretation and I think was done so on purpose.

If we look at the SEC filing Hotchkiss is in Rohm at about $69 a share. That means they are underwater in their holdings at current prices by about $15 a share. This press release is a stunning attempt to manipulate public opinion and the market through a lack of transparency….

Anyone at the SEC working today????

Disclosure (“none” means no position):Long Dow , None

Visit the ValuePlays Bookstore for Great Investing Books

I have been trying to make this point for a while. He is another take on it re: the Rohm & Hass (ROH) / Dow Chemical (DOW) litigation is not the slam dunk some seem to think it is. This is from Peter Friedman, a law professor and former Wall Street attorney.

Here is the post…

Courts are supposed to do justice even if doing so costs individuals a lot of money.

Joe Nocera writes in the New York Times that to even suggest “that maybe, just maybe, deals that stop making sense ought to be called off, or at least rejiggered, especially in the middle of a once-in-a-lifetime financial crisis – invites withering scorn, especially if you say it to someone on Wall Street or in the legal profession.”

I’ve worked in the legal profession on Wall Street, and I like to think that when what the law seems to compel makes no sense the law has the capacity to adjust, to do justice instead of nonsense. My thinking isn’t purely the product of naivete and idealism. There really is a legal (or, rather, for the lawyers among my readers, an equitable) argument to stop the particular deal Nocera is writing about. Moreover, that argument is precisely that the deal makes no sense to an interest — the public — much more important than the individuals who would profit mightily from the deal.

Here’s the deal: “Last summer, the Dow Chemical Company won a heated auction for a well-run, highly valued specialty chemical company called Rohm & Haas. . . . The price it agreed to pay was high: $78 a share in cash, a 74 percent premium, for a total of about $15.3 billion.” The problem is that in light of the global financial crisis and a collapse of the chemical business, if the deal goes through the resulting Dow/Rohm & Haas entity “could be badly damaged, saddled with high-priced debt in a horrible business environment, and a junk bond credit rating.”

What does that mean? It means that if the deal goes through Dow would need to strip itself to the bare bones to survive or would collapse altogether. This while “Dow Chemical employs around 45,000 people; Rohm & Haas employs more than 15,000.” This while “the American chemical industry – which was suffering even before the financial crisis because of the rise of commodity chemical companies in China and elsewhere – is going to be in a bad place for the foreseeable future.” This “[a]t a time when every job matters, and when the economy is holding on for dear life . . .”

In return, the shareholders of Rohm & Haas will get $15.3 billion. According to Answers.com, ‘the Haas family, descendants of one of the company’s two founders, continue to control a substantial ownership interest of nearly 30 percent” of those shares. So the the Haas family and the other Rohm & Haas shareholders are suing for “specific performance” of the contract with Dow; that is, they are asking a Delaware court to order Dow to go through with the deal to buy Rohm & Haas for $15.3 billion.

I’m not sure why there’s “withering scorn” for the suggestion that a court might refuse to enforce a deal that threatens 60,000 jobs and, as Nocera writes, would probably destroy “billions of dollars of value.” It’s no stretch to suggest that at a time of global economic collapse and at a time when President Obama is fighting to inject billions of dollars into the economy, the deal is not in the public interest.

Why am I willing to defy the withering scorn of the Wall Street experts? Because specific performance, the remedy Rohm & Haas is asking the court to grant, is an what is known as an “equitable” remedy. In order to show it is entitled to equitable relief, Rohm & Haas must show that the outcome makes sense even after the court balances “all the equities” involved. In other words, the court must determine whether, considering all of the interests at stake in the lawsuit, ordering the deal to go through would be more fair than unfair. The public interest plainly is one of those interests the court must consider. Because the deal poses such a great threat to the public interest, the equities do not favor the deal; the equities, in fact, weigh heavily against enforcing the contract between Dow and Rohm & Haas.

In legalese, Corporate and Commercial Practice in Delaware confirms that this is the law in Delaware:

[I]f specific performance of a contract would cause significant public harm, then the Court has discretion to deny such relief, even where a breach of contract and substantial harm to plaintiff have been established . . .

1-12 Corp & Commercial Practice in DE Court of Chancery § 12.03 (Matthew Bender 2008), citing Alro Assoc., L.P. v. Hayward, CA 19544 (Del. Ch. Oct. 31, 2003), mem. op. at 22-26 (holding that where plaintiff had established breach of contract by Delaware Department of Transportation and where Court had assumed irreparable harm to plaintiff, specific performance was not appropriate due to a balance of equities weighing strongly in favor of public interest).

Courts really are supposed to do justice notwithstanding the fact Wall Street expresses withering scorn at the thought.

Link to original post

Now, Dow is trading as if they will be forced to complete the transaction on after the trial in March. Should that not be the case, shares should surge…

Disclosure (“none” means no position):Long DOW

Visit the ValuePlays Bookstore for Great Investing Books

A follow-up to my recent post.

Tradefast Says:

To my point- it isn’t just the market for stocks and snow shovels which exhbit cyclical/predictable patterns. These patterns are also apparent in the market for physical business assets – plant and equipment.

Pick a major steel company, a paper company, a chemical company (without loss of generality)- if the company had to dispose of all their plants at the bid side of today’s market, would any of these companies be solvent. Why? Because the bid/ask spread for these physical assets is exceedingly wide in a recession. If you marked all of U.S. Steel’s assets to the price where they can sell a marginal ton of capacity, X would be bankrupt. Fortunately, X is under no pressure to liquidate assets – so we can all play along with the assumption that the company is solvent, with a very substantial net worth.

Ah, but what about the banks? No such benefit of the doubt is given to banks. We assume that if a bank has assets with a wide bid/ask, the bank must be camoflauging the fact that they are insolvent and most of their assets are ‘toxic’. The market is broken, illiquidity premiums are enormous, bid/ask spreads on bank assets are in disequilibrium, and mark-to-market account rules need to be repealed, ASAP. I expect the accounting rules to change, probably within a week.

My two cents:
There have been rumors all week that some repeal of it is in the works. Not a full reversal of the policy, but one that deals with illiquid securities that essentially have no market. When forced to liquidate, the seller takes whatever the buyer offers. That then sets the market for all other securities held by all whether they need to sell or not.

In its basic essence, mark to market empowers to weakest holder of securities to set the value of the strongest’s, thus dragging down the whole system to its level. That is not what capitalism is about. The strong are supposed to survive and prosper while the weak fall by themselves to the wayside.

What has happened now is the weak, far from falling by the wayside have become a massive anchor on the whole system……..not good.

Disclosure (“none” means no position):

Visit the ValuePlays Bookstore for Great Investing Books

Spoke Friday with sources who have insight into the litigation between Dow Chemical (DOW) and Rohm & Hass (ROH). Some notes

– Delaware courts are “courts of equity”. Simply put, the Judge has a broad array of remedies short of forcing a merger. He could rule for or against “specific performance” and either force the merger or not and then decide on damages. Should he rule against Dow, they would have the option of an appeal.

– He also has the option to order specific performance but at a later date.

– The Judge did seem to recognize and agree that specific performance was a remedy of equity and that because he is in a court of equity, he won’t simply ignore certain realities outside of the contract.

– Dow is trying to impress on the court that those at Rohm & Haas who are fighting to close now, have no interest in the health or outcome of the company after the merger and that the well-being of the near 60,000 employees should be taken into account by the court.

For instance, the family of company founder Otto Haas, would receive $5 billion, Raj Gupta, the chief executive officer of Rohm & Haas would receive over $100 million and Paulson & Co. Inc., second-largest holder of Rohm & Haas stock, the value would be $1.5 billion. In short 3 groups receive nearly 50% of the proceeds of the sale.

Recently, David Bernick, an attorney for Dow, said the Haas family and other shareholders cared only about the huge payout, even more than the future of the company and its employees. “The Haas family apparently has no interest in the health of Rohm & Haas,” he said last week.

This is illustrated by the unwillingness of management to work with Dow at all on the closing date. What happens to the combined entity after the closing is of no interest to management.

– Paulson’s letter was self indulgent and old news. Dow has already considered (and publicly said so) and investigated the remedies he put forth in the letter. His offer to put money into an offering was gratuitous.

Separately, I was informed later in the day Friday (from other sources) that:

– Dow is in very active conversations with parties regarding the commodity business. The source said they believe that the primary party was Sabic or the Saudi Basic Industries Corp. You’ll remember they were the buyer for GE’s(GE) plastic business

More on this as I get more information..

Disclosure (“none” means no position):Long DOW

Visit the ValuePlays Bookstore for Great Investing Books