Dow Renegotiates Venture With Kuwait

Dow Chemical Co. renegotiated a deal to split off some of its chemical plants into a joint venture with Kuwait Petroleum Corp., accepting a lower price for the assets it will contribute.

While Dow Chemical will get about $500 million less than it originally planned, analysts expressed relief that the deal is going through at all, given the turmoil in the chemical industry.

Dow will use the $9 billion in cash generated by the asset sale to expand its higher-profit specialty chemicals, in part through its planned $15.3 billion purchase of Rohm & Haas Co., which makes coatings and electronic materials. Investors had worried that the latter deal would be derailed if the Kuwaiti joint venture fell through, but Andrew Liveris, Dow's chief executive, said he expects to close the acquisition early next year.
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Chemicals producers have been battered this year, first by soaring oil prices and then by the global economic slowdown. Kuwait Petroleum said last month that the Kuwaiti government asked it to review the terms of the joint venture, which involves 15 production locations, scattered in North America, Latin America and Europe. The companies originally announced plans for the venture last year.

Under the new terms, Dow will get a total of $9 billion -- about $500 million less than it originally planned. Of that total, $7.5 billion will be in a direct cash payment. In addition, both Dow and Kuwait Petroleum, as shareholders, will also receive a special cash contribution of $1.5 billion. The money for the cash contribution, which wasn't part of the original deal, will be borrowed by the joint-venture company.

The reduced price, approved by the Kuwaiti government last week, reflects the turmoil in the chemical industry as the global economic slowdown dries up demand for chemical products, Mr. Liveris said in an interview Monday.

"The economic recession that's in place means that it's going to be tougher for this business in the next few years," he said.

"In this environment, it's a positive that they were able to complete any kind of transaction," said Frank Mitsch, managing director of BB&T Capital Markets in New York.

The joint venture is a major part of Dow's effort to shift its operations away from manufacturing low-margin basic chemicals, a business that requires a steady supply of low-cost oil and natural gas. Also, the deal with Kuwait is expected to give Dow preferential access to feedstock for new projects the two companies work on together in the future.

Dow and Kuwait Petroleum will each own 50% of the joint venture. The joint venture, which will be called K-Dow Petrochemicals, will begin operations by the start of 2009.

The companies said the Dow businesses going into joint venture had a revised enterprise value of about $17.4 billion, down from $19 billion.

Among the plants Dow is putting into the joint venture are those that produce polyethylene, polypropylene and polycarbonate, commodity chemicals that have come under intense competition from producers in energy-rich developing countries.

Under the revised deal, K-Dow will also include two existing joint ventures between Dow and Kuwait Petroleum's subsidiary Petrochemical Industries Co.: MEGlobal, which makes ethylene glycol, and Equipolymers, a supplier of PET (polyethylene terephthalate) resins. That will push the venture's expected annual revenue to $15 billion, up from $11 billion under the original deal.

Amid a steep selloff on Wall Street, Dow shares slipped 62 to $17.93. Overall, demand for chemicals is waning as manufacturing-intense economies, such as China's, slow down. Chemical giant BASF said last month it planned to temporarily close 80 plants world-wide and cut output as much as 25%. Dow has said it expects weak demand to continue at least until the second half of next year and is reviewing options to cut costs.