BLOOMBERG: Dow Chemical to Sell Assets, Cut Jobs to Fund �Rich� Rohm Deal

Saturday, December 19, 2009

BLOOMBERG: Dow Chemical to Sell Assets, Cut Jobs to Fund �Rich� Rohm Deal

By Jack Kaskey and Jef Feeley

March 10 (Bloomberg) -- Dow Chemical Co., the largest U.S. chemical maker, will use asset sales, job cuts and new debt to try to maintain investment-grade credit ratings after paying what some investors are calling a �rich� price for Rohm & Haas Co.

Dow plans to raise about $4 billion from selling assets, including at least $1.5 billion from Rohm & Haas�s Morton Salt unit, Dow Chief Executive Officer Andrew Liveris said yesterday. The company will issue $4.3 billion of debt and cut costs by $400 million more than previously estimated, partly by eliminating an additional 3,500 jobs, mostly at Rohm & Haas, Liveris said.

Liveris sought new terms for the buyout after a joint venture with Kuwait collapsed, depriving Dow of $9 billion and prompting debt downgrades. Rohm & Haas investors will get $78 a share as originally agreed, and the two largest shareholders get equity that cuts Dow�s cash cost by as much as $3 billion and contributes to a 7.8 percent higher deal price of $16.5 billion.

�There are still concerns about the financial viability of Dow, and the fact they still agreed to pay $78 a share to the individual shareholders was a bit of a disappointment,� said Gene Pisasale, who helps manage $13 billion, including Dow shares, at PNC Capital in Baltimore. �That is a pretty rich price.�

Dow refused to complete the all-cash purchase as planned in January, saying the combined company wouldn�t be viable because of slumping chemical demand and increased debt. The companies reached the accord after the start of a trial in Georgetown, Delaware, was delayed for settlement talks.

Dow, based in Midland, Michigan, fell 45 cents, or 7.1 percent, to $5.88 in trading after the official close of the New York Stock Exchange. Philadelphia-based Rohm & Haas rose $3.42, or 4.6 percent, to $77.42.

�Favorable Resolution�

�This is a favorable resolution for Rohm & Haas because the shareholders are getting exactly what they were promised,� said Dmitry Silversteyn, an analyst at Longbow Research in Independence, Ohio.

Under the revised accord, which is set to close on April 1, Dow will pay a so-called ticking fee of $100 million a month from Jan. 10 to closing, contributing to the higher deal price, Chief Financial Officer Geoffery Merszei said yesterday.

The Haas family trusts and Paulson Co., the largest shareholders will exchange some of their stock for $2.5 billion in preferred Dow shares, and the Haas family may take an additional $500 million in equity at Dow�s discretion, the company said.

Interest payments on the preferred shares will reduce annual earnings by as much as 20 cents a share compared with debt financing, Merszei said.

Bridge Loan

Dow will need to draw only $9.5 billion of a $12.5 billion bridge loan to finance the deal because of the latest equity investments, Merszei said. In addition, Dow has a $3 billion equity investment from Warren Buffett�s Berkshire Hathaway Inc. and a $1 billion investment by the Kuwait Investment Authority.

By June, the issuance of long term debt will help cut the bridge loan to $4 billion, and asset sales will help Dow repay the entire amount within a year, Merszei said.

Standard & Poor�s said March 6 that Dow�s corporate credit and senior unsecured debt ratings of BBB, two levels above junk, may be lowered if the merger closed on the original terms or if the company was found liable for a large legal judgment.

Dow has six bidders for Morton Salt, the biggest U.S. salt producer, and the unit will be sold soon after the merger is complete, Liveris said. Selling stakes in a Dutch oil-refining business and in southeast Asia olefins ventures will raise about $1.5 billion, Liveris said. Other businesses worth about $1 billion will be sold, he said.

Job Cuts

Dow plans to save $1.3 billion by combining purchasing operations, sharing services and closing duplicate plants and research facilities, Liveris said. The latest job cuts bring the total at both companies to 10,000, he said. The combined company will spend $1.6 billion a year on research, among the biggest budgets in the industry, he said.

Acquiring Rohm & Haas was a key part of Liveris�s effort to transform Dow from a commodity producer into a maker of specialty products, such as material for electronics and paints, that command higher profit margins.

�This deal is strategic and it positions Dow for the future,� Liveris said. �We are back in control of our own destiny.�

Dow is pursuing more than $2.5 billion in restitution through arbitration from Kuwait�s Petroleum Industries Co. for backing out of an agreement to buy a 50 percent stake in the basic plastics unit, the world�s largest maker of polyethylene plastic. Dow isn�t aggressively pursuing damages against the nation in case it wants to restart the aborted K-Dow joint venture, he said.

Other state-owned petroleum companies also are interested in buying the plastics stake, Liveris said.

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