Markets stunned by Kuwait's cessation of K-Dow JV

03-Jan-09
Dow released a statement on 28 December that it had been "verbally informed" by its partners at Kuwait Petroleum Corp (KPC) and PIC that the Kuwait Supreme Petroleum Council (SPC) was reversing its prior approval of the agreement between Dow and PIC to create the 50-50 joint venture. The $17.4bn deal was supposed to close on 1 January. The much anticipated petrochem JV between Dow and Kuwait's PIC has met an untimely termination, just days before the JV was to commence. This has stunned market players, as the deal was revised in November in a move that favoured Kuwait and reduced its value to Dow by as much as US$2 bln. On 24 December, Dow chairman and CEO had issued a lengthy statement defending the deal and explaining why it would be a good thing for Kuwait. The pull out seems to be an act by a group of Kuwaiti opposition lawmakers who managed to convince the country's Prime Minister about the non-viability of the project amid deteriorating demand in a global economic downturn. K-Dow was to be based in Michigan and include Dow's manufacturing and marketing assets for some plastics materials, including polyethylene, polypropylene, and polycarbonate. The joint venture fit into Dow's "asset light" strategy, to team up with Kuwait's Petrochemicals Industries Co (PIC) to reduce feedstock procurement costs in a bid to reduce the cyclic nature of the business and increase profitability. The pullout could have a possible impact on Dow's pending acquisition of specialty chemicals firm Rohm & Haas for almost US$19 bln, which was to be funded partly by some of the proceeds from the K-Dow transaction. Dow can file an arbitration claim of as much as US$2.5 bln as outlined in a recent Securities and Exchange Commission filing. Though Rohm & Haas continues to work diligently towards completing the proposed transaction with Dow in early 2009, it's per-share stock price fell 16% on 29 December. K-Dow was considered the cornerstone of Dow's asset-light strategy and was to provide cash proceeds to fund Dow's long-term transformation into an integrated, market facing, specialty chemicals concern. The cancellation increases risk for Dow by placing additional strain on the firm's balance sheet and by calling into question the sustainability of Dow's dividend over the immediate term. Dow has paid regular cash divided each quarter for 96 years. Dow had eliminated as many as 200 jobs throughout the company in anticipation of the K-Dow JV going through. Most of these eliminations were of jobs that were not going to transfer to the JV. Some of the cuts were achieved through employees taking early retirement from the company. How will Dow finance that deal without risking the company in such economic times? Kuwait's decision has deprived Dow of about US$9 bln in planned financing which it would have used for the Rohm deal. It is likely that Dow will renegotiate the price of the deal to reflect the recent drop in Rohm & Haas' share price. Dow agreed in July to buy Rohm & Haas for US$78 a share to broaden its specialty product offerings. The deal carries a termination fee of US$750 mln payable to Rohm & Haas. Shares of Dow Chemical and Rohm & Haas plunged in reaction to Kuwait's decision, reducing Rohm & Haas' share price to US$53.34. The pull out seems to turn Dow's entire strategy upside down and is a waste of two years of energy and resources.
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