Chemical and agricultural products manufacturer Dow Chemical Co. (DOW), which received a blow last month when a multi-billion dollar agreement was scrapped by Kuwait, said Tuesday that it would pursue legal as well as other options concerning the collapsed deal. The company also stated that it has accelerated discussions around new partnerships and reiterated its commitment to strong investment grade rating.
The Midland, Michigan-based-based company was last month informed by its partners at the Kuwait Petroleum Corporation, or KPC, and Petrochemicals Industries Company, or PIC, about a decision made by the Kuwait Supreme Petroleum Council, to scrap the agreement between Dow and PIC to form K-Dow Petrochemicals, a 50-50 joint venture company valued at $17 billion.
PIC was estimated to invest $7.5 billion in the joint venture, with a net payment of $6 billion that included the cash distribution from K-Dow. Dow intended to use proceeds from the deal to repay a large part of the debt that it will have to assume to close the acquisition of rival Rohm and Haas Co. (ROH).
On December 31, 2008, Dow received official written notice from PIC that the closing must be postponed because the Kuwaiti Supreme Petroleum Council withdrew its earlier approval of the transaction. Dow said today that it would seek to enforce its rights under the terms of the various agreements and the JVFA executed by Dow and PIC since the joint venture partnership was first announced in December 2007.
"We were shocked by this news, and this was completely unexpected given the approvals already received and the behavior, actions and words from our partners. We have over 1,500 documents prepared for closing for what we believed to be Day 1 of K-Dow Petrochemicals on January 2," said Dow's Chairman and CEO Andrew Liveris. "Pursuing legal options is not a decision we take lightly, especially because of the longstanding partnerships we have established in Kuwait over the past decade, but PIC is in breach of contract, and we must take action to protect the interests of our company and our shareholders."
The largest U.S. chemical maker said it has already been approached by other interested parties about joint venturing for the basic plastics businesses. As a result, Dow will establish a formal process to secure a joint venture partner to accomplish the goals of its asset light strategy. The company, however, is prepared to close K-Dow immediately if PIC does indeed cure the breach of contract.
Dow believes that the identification of an alternative joint venture partner for its basic plastics business combined with the acceleration of planned divestitures and several additional divestments consistent with the company's strategy will yield proceeds greater than the funds Dow estimated to receive in connection with the K-Dow joint venture.
Dow and other chemical makers are facing a slump in global demand for their products. In last November, Dow said it would take bold and proactive measures, including options to reduce costs and eliminate or defer capital spending, to manage its transformation through the challenging times.
On December 8, Dow announced slashing of about 5,000 full-time jobs, or roughly 11% of its global workforce, amid the global economic slowdown. The company also said it would close 20 facilities in high-cost locations and divest several non-strategic businesses as part of its efforts to reduce costs. Dow added that it would temporarily idle about 180 plants and significantly reduce its contractor workforce worldwide by about 6,000 as predicated by reduced operations.
The company noted Tuesday that it took aggressive action in 2008 and would accelerate these actions even faster and more aggressively in 2009, which would also allow it to preserve its strong investment grade rating. These actions include an acceleration of expense and capital reduction programs as well as cash preservation measures.
Dow said the combination of planned actions on cash flow as well as operating earnings would allow it to continue to pay its regular, quarterly cash dividend, which the company has done for 389 consecutive quarters without reduction or interruption, since 1912.
Liveris added, "While the events of the past week have been extremely disappointing and completely unexpected given where we were in the approval process, Dow is and will continue to be a strong, globally diverse company with a wide range of options available to us for delivering on our strategy. It is certainly true that the actions in Kuwait have accelerated the need for decisive action but our strategy remains as relevant as ever and will drive the choices we make to become a company that will thrive in the changing markets of the 21st century."
Collapse of the Kuwait deal cast doubts over Dow's ability to finance the purchase of Rohm and Haas. It was on July 10 that Dow decided to acquire all outstanding shares of Rohm and Haas for $78 per share or $18.8 billion in cash. Dow had planned to finance the deal with a $13 billion bridge loan, a $3 billion equity investment by Warren Buffett's Berkshire Hathaway Inc. and a $1 billion investment by the Kuwait Investment Authority. The proposed acquisition, expected to close in early 2009, will make Dow the world's leading specialty chemicals and advanced materials company.
Though investors are worried about the future of the deal, Credit Suisse said the merger agreement between Dow and Rohm and Haas leaves little room for Dow to walk away from the deal. "…given the specialty nature of ROH's assets as well as DOW's desire to transform itself into more of a specialty chemical company, we believe that DOW management will still work to close the ROH deal, although it may attempt to negotiate a lower price and/or structure than the $78/share all-cash deal originally agreed upon between the two parties in mid-July,'' the brokerage said in a client note last month.
DOW closed Monday's regular trade at $15.05, down from the previous close of $15.41, on 27.59 million shares.
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