Dow Chemical / Rohm & Haas Still Have Problems

As Originally Posted to The Wall Street Journal

Dow Chemical and Rohm & Haas spent months fighting over their $15.3 billion deal, weeks engulfed in legal squabbles and the last frantic days negotiating a settlement that will enable Dow Chemical to go through with the acquisition of its chemicals rival.


A Hollywood ending? More like one of Shakespeare’s “problem plays,” in which justice is served but the audience leaves morally uneasy about the resolution. That is where Dow Chemical is, still struggling with high debt and oppressive interest payments while its revenue has fallen off and it has cut nearly one-third of its operations. And each victory of the settlement is shadowed by the prospect of a future defeat.

For instance, Dow Chemical won some attractive concessions from the syndicate of banks behind its $13 billion bridge loan: extending the bridge for one more year and giving Dow a total commitment of $20.5 billion–$12.5 billion in the first year and $8 billion in the second year. In the first year Dow will pay a modest interest rate of just Libor plus 1.25 percentage points. And all this after Dow Chemical has complained that its business wouldn’t be viable if it were forced to to through with its agreed-to acquisition of Rohm & Haas. (Dow Chemical also received money from the Rohm & Haas family trust, Berkshire Hathaway and the Kuwait Investment Authority, so it may need only around $10 billion of the bridge loan, according to Hilliard Lyons analyst Stephen O’Neil.)

Yet, the new debt agreement wasn’t enough for the folks at credit rater Moody’s, who still warned that Dow Chemical could be downgraded if it doesn’t right its financial house and reduce that debt. Debt also was spotlighted by Citigroup analyst P.J. Juvekar, who warned investors against buying Dow stock right now because:

Dow’s agreement to acquire Rohm puts it in a leveraged position going into the downturn. Dow ends up with gross debt of $25.2 billion (net debt of $22.1 billion) after drawing ~$10B on a bridge loan…High Operational Leverage AND Huge Financial Leverage – Dow’s “twin leverage” magnifies the EPS impact in a downturn, but on the flip side, this can work great in an upturn…Now to be sure, we don’t think there are any “insolvency” concerns on Dow despite the insolvency argument put forth during negotiations with ROH….We remain in a deepening recession that is global in nature, so we think investors should stay on the sidelines.

Adding to the debt issue is the $2.5 billion in perpetual preferred stock Dow Chemical sold to the Rohm & Haas family trust and Rohm’s other large shareholder, Paulson & Co. While the preferred stock sale prevents Dow Chemical from borrowing more money against the bridge loan, it also has a high price: a 7% cash dividend, in addition to an 8% payment-in-kind dividend.

Then there are the asset sales. Before the settlement, Rohm & Haas (and its investors) had pushed Dow Chemical to sell assets to raise cash to pay for the deal. But that prospect threatened the company with the loss of cash-flow generators. With the settlement, Dow Chemical no longer will try to sell its Agricultural Sciences business, one of the company’s top performers and a business valued at roughly $7.7 billion. Dow had been so intent on keeping the business that it didn’t loop in potential buyers like Syngenta, and instead discussed a stake in the business to private equity firms. But Citigroup’s Juvekar said Dow Chemical will have to sell assets anyway:

“Dow plans to pay down the outstanding $10 billion bridge loan by the end of year 1. That sounds aggressive to us since $3.8 billion of the repayment is predicated upon successfully divesting certain businesses, such as its 45% stake in a Dutch petrochemical refinery Total Raffinaderij Nederland, its equity stakes in olefins and derivatives businesses in Southeast Asia, and ROH’s Morton Salt business.”

He went on calculate that with the sales, the company would lose $760 million of earnings before interest, taxes, depreciation and amortization.

Rohm & Haas’s family trust, which threw roughly half its profits from the merger into more Dow stock, is making a vote of confidence in Dow Chemical. As in Shakespeare, we must wait for the next act to see if that confidence is justified.

UAW Members Await GM Health Deal After Ford Contract Ratified

As Originally Posted at Bloomberg

United Auto Workers members at General Motors Corp. will have to wait for an agreement on a union retiree health-care fund before voting on labor concessions GM needs to keep U.S. aid.

A UAW-GM agreement approved Feb. 17 by negotiators is similar to the economic matters ratified by UAW members at Ford Motor Co., UAW Vice President Cal Rapson wrote in a letter yesterday to local presidents and chairmen. GM and the UAW are still negotiating changes to the so-called Voluntary Employee Beneficiary Association, the letter said.

GM must persuade the UAW to swap $20.4 billion in future obligations to the VEBA for half that in cash and the rest in equity as part of U.S. Treasury requirements to keep $13.4 billion in loans and win approval for as much as $16.6 billion more. GM has said it needs at least $2 billion in fresh aid by the end of this month or it will be bankrupt.

Changes to the GM contract “in the area of economics, pattern the UAW Ford agreement,” Rapson said in the letter. Other parts, he said, are “drastically different.”

For example, there are no mandatory physical examinations and “other parts of the agreement are different to better fit GM culture.”

The UAW walked out on GM talks on Feb. 13 in a dispute over the VEBA demands and later returned to approve only other concessions. GM UAW members must still ratify the agreement for it to be implemented.

GM spokeswoman Renee Rashid-Merem said the automaker isn’t commenting on the VEBA negotiations, which are ongoing. UAW spokesman Roger Kerson didn’t return a phone call or an e-mail seeking comment.

Ford Changes

The Ford contract changes won the support of 59 percent of production workers and 58 percent of skilled-trades employees, the union said yesterday in a statement. The terms include elimination of annual bonuses and cost-of-living pay increases, as well as reductions in layoff benefits and in the company’s cash contribution to the VEBA for Michigan health insurance.

A key provision of the Ford accord lets the Dearborn, Michigan, automaker cut by half its cash contribution to the VEBA. Stock will make up the balance of the payments to the fund, beginning in 2010 when $3.2 billion is due, according to a March 5 report by Chicago-based analyst Brian Johnson of Barclays Capital.

Union Givebacks

Ford’s labor agreement also eliminates the so-called jobs bank, a 25-year-old program that paid UAW employees their full salary indefinitely to report to work when there were no duties to perform. GM and Chrysler LLC have eliminated their programs.

Instead, Ford union workers with more than 20 years will get 52 weeks at about 70 percent of their gross wages, so-called supplemental unemployment benefit, or SUB, pay -- or about double what they would receive in unemployment -- and 52 weeks more at half that rate.

Workers with more than 10 years and fewer than 20 get 39 weeks of full SUB pay and 39 weeks at half the rate. A worker with less than 10 years’ service gets 26 weeks at full supplemental pay and 26 weeks at half.

In the past, workers would get the supplemental pay for 48 weeks and then go into the jobs bank.

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.

Germany Considers Aiding GM's Opel, U.K. Weighs Vauxhall Options

As Originally Posted at The Wall Street Journal

Germany and the U.K. continued to weigh solutions for troubled European subsidiaries of General Motors Corp. on Monday, as Washington debated rescue plans for the auto giant in the U.S.

The U.K. government plans to sit down Wednesday with auto-industry representatives and others to discuss support for the country's auto sector, in which GM's Vauxhall subsidiary plays a major role.

In late January, the U.K. government announced a £2.3 billion ($3.24 billion) loan-guarantee package to support the sector, although industry officials at the time questioned how quickly funds would be made available.

Asked whether there would be any fresh support announced for the auto sector and Vauxhall in particular, a spokesman said "if there are any announcements to be made Wednesday, we'll announce them Wednesday."

Wednesday's meeting will be hosted by Business Secretary Peter Mandelson and will include officials from banks and regional development agencies, a spokeswoman for the department said.

"Vauxhall is in terrible trouble," Mr. Mandelson said on BBC television Sunday. "I've spoken three times in the last week to the president of General Motors in Europe; I've also spoken to the German economics minister because their plants are similarly affected and we will approach what we need to do together on this."

In Berlin, a government spokesman said Monday that securing jobs at GM's big Opel plants will be the government's main aim if it decides to give the company any aid. The spokesman, Thomas Steg, said it was clear that restructuring plans for Opel weren't sufficient for the government to make a final decision.

"This plan is still incomplete and requires a fleshing out," Mr. Steg told reporters. "The federal government's aim is clear: to secure jobs at the Opel plants permanently," he added. But any decision to help Opel could take weeks, he warned.

GM Europe Chief Executive Carl-Peter Forster last week presented the company's restructuring plan for Opel to the government and said GM needs €3.3 billion ($4.17 billion) in aid across its European operations. GM posted a total 2008 loss of $30.9 billion.

German politicians are under pressure from labor unions to bail out Opel, GM's largest European brand, to help save the company's 25,000 jobs -- a figure that more than doubles when including parts suppliers and other Opel-linked companies.

However, signs of a growing rift between the government's two ruling parties could complicate rescue plans.

The center-left Social Democratic Party worries that calls by Chancellor Angela Merkel's conservative Christian Democrats for detailed restructuring plans could cost jobs if the company goes under before it can be saved.

"We will help when the benefit for all people is more than the harm," Ms. Merkel said in her weekly video-streamed message Saturday.

The SPD's leader, Foreign Minister Frank-Walter Steinmeier -- who will challenge Ms. Merkel in general elections next fall -- is pressing for a quick solution.

"Politicians are responsible to protect Germany as an industry location," Mr. Steinmeier said over the weekend. "Politics must now come into play and fight for every job."

Interior Minister Wolfgang Schäuble, a member of Ms. Merkel's conservative party, said last week that Opel should seriously consider filing for insolvency because such a move could help the company protect its business assets.

The financial predicament of GM's European operations also could feature at an Anglo-German summit Friday, when Ms. Merkel visits the U.K. for meetings with Prime Minister Gordon Brown.

UAW, Ford Reach Agreement

Original Story From Associated Press
As Posted at Forbes

The United Auto Workers Union says its members working for Ford Motor Co. have approved contract changes that include freezing wages and cutting other benefits in a move to aimed at helping the automaker remain competitive.

The approved agreement also ends the jobs bank program and lets Ford make payments in stock to a union-run trust for retiree health care.

The union says 59 percent of production workers and 58 percent of skilled-trades workers voted for the agreement.

Ford is not seeking government funding and is the first U.S. automaker to come to an agreement with the union.

Visteon's Risk for Bankruptcy Deepens

As Originally Posted in The Wall Street Journal

Visteon Corp.'s bankruptcy risk intensified Wednesday after the auto-parts maker posted a wider fourth-quarter loss and said it might violate its debt covenants as the economic downturn slams automotive companies.

The former Ford Motor Co. subsidiary said it is prepared to do whatever is necessary to shore up its capital base, including eliminating or selling "substantial assets or operations." Chief Executive Don Stebbins declined to provide more details and didn't take questions from analysts during the company's fourth-quarter conference call.

"We said we anticipated continued production weakness in the fourth quarter, however, the speed, the severity and the breadth of the change greatly exceeded our expectations," Mr. Stebbins said.

Auto-parts makers are struggling as vehicle makers cut production with sales tumbling to the lowest levels in decades.

Visteon's willingness to shed operations shows how dire the situation has now become for the company, which hasn't turned a profit since it was spun off in 2000.

Visteon, whose products include satellite radios, instrument displays and climate-control equipment, has already undertaken a massive restructuring in the past several years, including shrinking its work force and giving back some of its underperforming plants to Ford. At the end of 2008, its work force stood at 25,550, compared with 39,300 at the end of 2006.

Now it intends to cut 1,000 salaried workers -- up from an original target of 800 -- by the end of March and take other steps such as slashing pay, suspending 401(k) matches and looking for voluntary separations in its European operations.

Visteon, based in Van Buren Township, Mich., reported a fourth-quarter net loss of $328 million, or $2.53 a share, compared with a year-earlier net loss of $43 million, or 33 cents a share. The latest quarter included a $200 million write-down at its interiors business. Revenue slumped 42% to $1.65 billion.

For the year, Visteon's net loss widened to $663 million.

The company had cash of $1.18 billion at the end of 2008, compared with $1.76 billion a year earlier. It drew down $30 million in January under a credit agreement and has borrowed a total of $105 million.

Ford, which posted a $14.6 billion loss for 2008, said in January that it won't provide any special treatment for its former parts unit.

Visteon has continued to diversify away from Ford for the brunt of its sales. Ford accounted for nearly 30% of product sales in the quarter, while Hyundai Motor Co. and subsidiary Kia Motors Corp. made up 28%. Europe and the Asian-Pacific region each made up nearly 35% of product sales.

Textron Taps Out $3 Billion In Credit

As Originally Posted in The Wall Street Journal

Textron Inc., struggling with the impact of the credit crunch on its commercial-finance business, said it drew down its entire $3 billion in bank credit lines.

The announcement rattled investors, who tend to view credit lines as cash sources to be tapped in emergencies. Shares of the Providence, R.I., defense contractor and aircraft maker fell 21% in 4 p.m. composite trading Wednesday on the New York Stock Exchange.

Shares of Textron, which is battling a slump in orders for business jets and a canceled defense contract, are down about 90% since last May.

Textron said that, after drawing down its bank lines and repaying all outstanding commercial paper, or short-term corporate IOUs, the company will have additional cash reserves of $1.2 billion.

The company said it would have to repay the $3 billion drawn from the credit lines in April 2012.

Chief Executive Lewis Campbell said the new borrowing puts the company "in a strong position for 2009 and beyond," adding that "it is prudent to ensure cash liquidity in the current environment, and the bank credit lines provide such liquidity at very attractive terms."

The move comes after Textron in recent months said it was eliminating 6,200 jobs, or 14% of its work force and shutting down most of its commercial-finance business amid unstable credit markets.

Once-profitable finance units at a number of well-established companies, including bellwether General Electric Co., are causing headaches. The operations rely heavily on access to markets for short-term borrowing, which have either been frozen or expensive since last fall.

Textron said it would preserve only the part of its finance unit that lends customers money to buy Textron products.

Textron also has experienced a sales drop at its Cessna airplane unit. In a conference call last week, Mr. Campbell described the economy's impact on demand for corporate jets as "egregious."

Last October, the Defense Department, citing climbing costs and delays, said it was canceling a $6.2 billion Army contract for building hundreds of small reconnaissance and attack helicopters made by Textron's Bell Helicopter unit. Textron has a number of other businesses, including golf carts and automotive components, all of which are taking their hits in the downturn.

Textron reported net income of $486 million, or $1.95 a share, for the year ended Jan. 3, down 47% from a year earlier.

Revenue rose 13% to $14.25 billion from $12.62 billion.

Rob Stallard, a Macquarie Securities analyst in New York, said Textron's decision to draw down its credit lines makes sense because the company will save millions in annual interest payments after retiring its commercial paper, for which the company must pay investors higher rates.

But, Mr. Stallard said, "Investors are concerned that this is a sign of how desperate Textron is. They've had to use up their last safety net."