Dow Chemical buys Rohm and Haas

July 10, 2008 4:25:31 PM PDT
Dow Chemical Co. has taken a big step into a more lucrative segment of the chemical-making business, agreeing to buy a nearly century-old competitor, Rohm and Haas Co., at a steep premium for more than $15 billion in cash. A pricing and marketing consultant who follows the chemical industry said the companies' customers shouldn't fret about any immediate price increases.

"Really, truly, a new day has dawned" for Dow, Andrew Liveris, the chemical giant's chairman and chief executive, said Thursday in announcing the $78-per-share deal that includes money from a Kuwaiti sovereign wealth fund and Warren Buffett's Berkshire Hathaway.

The purchase price represents a 74 percent premium to Philadelphia-based Rohm and Haas' closing share price of $44.83 on Wednesday. The Haas family, descendants of one of the specialty chemical maker's founders, holds about 65 million shares, a 33 percent stake worth nearly $5.1 billion based on the purchase price.

Rohm and Haas shares soared $28.79, or 64 percent, to $73.62 Thursday while Dow shares fell $1.44, or 4 percent, to $32.52.

After the announcement, Standard & Poor's Ratings Services placed the ratings of Dow on CreditWatch with negative implications, meaning the Midland-based company has a 50 percent chance of being downgraded in the next three months. S&P currently holds an "A-" corporate credit rating on the company.

Geoffery Merszei, Dow's chief financial officer, said the quality and reputation of Rohm and Haas' businesses, brands, products and technologies - as well as its work force - make the premium worth paying.

"While it's hard to put a price on a company's culture and people, this premium recognizes the fact that Rohm and Haas is a highly coveted asset," Merszei said Thursday to industry analysts and investors.

Based on the per-share purchase price and the roughly 196 million shares Rohm and Haas had outstanding as of April 22, the deal is worth about $15.29 billion. The companies said assumed debt will boost the total value of the transaction to about $18.8 billion.

The acquisition is part of an effort by Dow to move into the higher-margin specialty chemicals market, which may provide a buffer against the ups and downs common in basic chemical sales. Specialty chemicals are produced for more specific uses, compared with those produced as high-volume commodities for manufacturing.

Dow said the deal will make it the world's leading specialty chemicals and advanced materials company.

"There aren't many jewels out there. This is one of them," Liveris said in the conference call. "The fact that it became available matched Dow's strategy perfectly."

Buckingham Research Group analyst John E. Roberts said in a note to investors that Rohm and Haas has been discussed as a great strategic fit for Dow for years and said it didn't previously appear that Rohm and Haas was for sale. If it was, Roberts said German chemical company BASF SE would have been interested.

"It would appear that Dow offered a pre-emptive price that ROH's board would have a hard time refusing," Roberts wrote.

The companies said they hope to complete the deal by early 2009. Dow expects it to help its financial performance in the second year following completion, with "pretax annual cost synergies" of at least $800 million per year.

Liveris said that before the deal Dow had expected earnings per share of $3.50 around 2010 and 2011, when it forecasts the next industry "trough." With Rohm and Haas, he said that should increase by $1 to about $4.50 per share. In 2015, when Dow next forecasts an industry "peak," Liveris says EPS should exceed $10 per share.

Dow in recent months has announced two sets of wide-ranging price increases in an attempt to offset record costs for energy and raw materials. Rohm and Haas also has increased prices, along with some other of the companies' competitors. Word of those increases have put pressure on shares of chemical makers.

"We believe Dow is paying a very high price," Oppenheimer & Co. analyst Edward Yang said in a note to investors. "This should provide a momentary valuation lift to the chemicals group, but we are hesitant to predict similar strategic deals at similar multiples."

"Just the whole idea of trying to integrate two large firms like this, especially as complementary as they are, culturally and product-wise, it's going to take a long time for a united Dow and Rohm and Haas to exert any kind significant pricing power beyond what they have today individually," said Frank Luby, a partner in the Boston office of Simon-Kucher & Partners, business consulting firm, Dow said the deal, coupled with plans for a joint venture announced in December with Petrochemical Industries Co., a subsidiary of state-owned Kuwait Petroleum Corp., will boost the percentage of its more profitable sales. Dow said it plans to announce a CEO and headquarters for the venture next week.

Under Thursday's deal, Dow plans to establish an advanced materials business unit at Rohm and Haas' current headquarters in Philadelphia and to contribute some Dow businesses to Rohm and Haas' existing portfolio, such as coatings and personal care. The total revenue of that new unit is expected to approach $13 billion.

Dow will retain Rohm and Haas' corporate name for this advanced materials business unit. Two Rohm and Haas directors will join Dow's board, increasing its size to 14 members.

"We strongly believe that by becoming part of Dow, we secure a brighter future and greater growth prospects for our business and for our employees," Raj Gupta, chairman and CEO of Rohm and Haas, said during the teleconference.

Liveris said the deal came together over the last three weeks, and it was only recently that it became possible to acquire Rohm and Haas.

"The value and opportunities this transaction will create are a tribute to its dedicated employees," John C. Haas, 90, said on behalf of the Haas family in a statement distributed by Dow.

Gupta said advisers to the Haas family and its trusts encouraged them to diversify their investments, which led Rohm and Haas to explore its options, including the sale. He said more details will later be made public.

Spokesman Chris Huntley said Dow outbid another company for Rohm and Haas. He declined to identify the losing bidder.

In the year before the sale, the company's stock had tumbled from around $62 to $44.

Dow has annual sales of $54 billion and about 46,000 employees worldwide. It makes everything from the propylene glycols used in antifreeze, coolants, solvents, cosmetics and pharmaceuticals, to acrylic acid-based products used in detergents, wastewater-treatment and disposable diapers.

Rohm and Haas, which has more than 15,000 workers around the globe and had about $8.9 billion in sales in 2007, makes products ranging from acrylic additives and binders that go into paint, enabling it to be smooth and lets it stick to the wall, to chemical coatings that go onto flat panel displays for brighter screens. It owns Morton Salt.

Dow and Rohm and Haas share some of the same competitors, including Celanese Corp. and DuPont Co.

Huntley said while the two companies are an excellent fit "with very little overlap," there is "no question" that some jobs will be lost after the deal closes.

Rohm and Haas arose from a single office established in Philadelphia in 1909 by two Germans, a chemist named Otto Rohm and entrepreneur Otto Haas. In recent years, Rohm and Haas has been shifting its focus onto markets in rapidly developing economies as a way to offset mature penetration in North America.

The Rohm family has not been involved in the company, including as stakeholders, for decades.

The deal has been approved by both companies' boards. It is pending approval by Rohm and Haas shareholders and regulatory approvals.

Dow said Citi, Merrill Lynch and Morgan Stanley have committed debt financing. The Kuwaiti Investment Authority is helping to fund the deal in the form of $1 billion in convertible preferred securities, while Berkshire Hathaway has agreed to an equity investment of $3 billion in the form of preferred securities.

After the deal closes, Merszei said Berkshire Hathaway will become Dow's largest shareholder.


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