11 March 2009

Dow To Sell Assets And Cut Jobs

As Originally Posted at Bloomberg

Dow plans to raise about $4 billion by 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, except for the two largest shareholders, who will receive partial payment in securities. 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 in January, saying the company wouldn’t be viable because of slumping demand and increased debt. Rohm & Haas sued, and the companies reached the new accord after delaying a trial in Georgetown, Delaware.

Shares Rise

Dow, based in Michigan along with Midland furniture manufacturer Case Systems, rose 8.5 percent, at 4:15 p.m. in New York Stock Exchange composite trading. Philadelphia-based Rohm & Haas climbed 5.4 percent.

“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 agreement, which is set to close on April 1, Dow will pay a so-called ticking fee of 8 percent a year, or $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.

Interest Payments

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

Dow is paying 15.3 times Rohm & Haas’s estimated earnings before interest, taxes and other items, which is “expensive” and delays value creation until 2015, David Begleiter, a New York-based analyst at Deutsche Bank AG, said today in a report. Dow’s increased debt prompted him to cut his price target for Dow shares. He maintained his “hold” rating.

“While the high price tag for the deal is already discounted in Dow’s low valuation, we would need to see debt reduction to be more positive on Dow’s shares,” Begleiter said.

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.

Bridge Loan

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.

The revised agreement and the asset-sale plan “provide some support for an investment-grade credit rating,” Moody’s Investors Service said today in a statement. “However, Dow will need to take additional actions over the next six to 12 months to ensure that they will be able to return credit metrics to levels that would support a solid investment grade rating.”

Moody’s and Standard & Poor’s cut Dow’s ratings on Dec. 29, after the Kuwait deal failed. S&P reduced Dow’s rating to BBB, two grades above junk, from A-. Moody’s cut Dow from A3 to Baa1, three levels above junk.

Bonds of the two companies fell. Rohm & Haas’s 6 percent notes due in September 2017 dropped 2.99 cents on the dollar today in New York, according to Trace, the bond reporting system of the Financial Industry Regulatory Authority. The yield was 9.1 percent. Dow’s 6 percent notes due in October 2012 fell 2.3 cents on the dollar to 83.3 cents, yielding 11.9 percent, according to Trace.

Salt Unit

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 Asian olefins ventures will raise about $1.5 billion, Liveris said. Other businesses worth about $1 billion also will be sold, he said.

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 one of the largest makers of specialty products, such as material for electronics and paints, which command higher profit margins. The combined companies earned $1.06 billion last year on sales of $67.1 billion.

Controlling ‘Destiny’

“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 through arbitration more than $2.5 billion in restitution 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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