K-Dow cancellation surprises experts in US

A group of Kuwaiti opposition lawmakers convinced Prime Minister Sheikh Nasser al-Mohammed al-Sabah to kill the JV, saying it was no longer viable given the global economic downturn.

The joint venture, dubbed K-Dow, was going 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 cut its raw material costs in order to reduce the cyclic nature of the business and increase profitability.

News of the pullout was surprising to some market watchers, especially since the deal was revised in November in a move that favoured Kuwait and reduced its value to Dow by as much as $2bn. On 24 December, Dow chairman and CEO Andrew Liveris had issued a lengthy statement defending the deal and explaining why it would be a good thing for Kuwait.

The pullout also could have an impact on Dow’s pending acquisition of specialty chemicals firm Rohm and Haas of Philadelphia for almost $19bn. Dow was expected to use some of the proceeds from the K-Dow transaction to fund the Rohm and Haas deal.

Dow officials could not be reached for comment on the pullout or its potential impacts – including the possibility of Dow filing an arbitration claim of as much as $2.5bn, as outlined in a recent Securities and Exchange Commission filing.

Rohm and Haas officials said in a 28 December news release that the formation of K-Dow “is not a closing condition” for the Dow acquisition.

“Rohm and Haas Co continues to work diligently towards completing the proposed transaction with Dow in early 2009,” officials said. Wall Street, however, was not convinced, sending Rohm and Haas’ per-share stock price down 16% to $53.50 in late trading on 29 December.

Industry consultant Balaji Singh said the K-Dow JV was “a victim of the drop in oil prices,” which have fallen from $147 per barrel in mid-July to $39 on 29 December. Middle Eastern nations such as Kuwait and Saudi Arabia often derive 80% or more of their national income from oil, added Singh, who is president of Chemical Market Resources in Houston.

“These countries don’t know how low oil will go or how long it will stay down,” he said. “It’s almost impossible for them to predict how much money oil will bring in, and they haven’t been able to diversify into other businesses.”

Singh added that Dow “is in a really tough situation” regarding Rohm and Haas.

“Under a normal situation, you would think the [Rohm and Haas] deal would not go through,” he said. “But this isn’t a normal situation.”

Analysts at Banc of America Securities in New York also were disappointed with the K-Dow pullout. “We view the news as negative since K-Dow was 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,” stock analyst Kevin McCarthy wrote in a note to investors.

McCarthy added that 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 a regular cash dividend each quarter for 96 years. Dow CEO Liveris has pledged to continue the dividend and keep that streak alive.

Roger Young, a former Dow executive who is now a consultant with Robert Eller Associates, said cancelling the deal was “a real stunner” that has “huge implications.”

“How does Dow fund Rohm and Haas? Will that deal unfurl? How does Dow finance that deal without risking the company in such economic times?” Young said in an email response to questions.

“This seems to turn the entire strategy of Dow upside down and [is] a waste of two years of energy and resources. How far this unravels Liveris’ total strategy will be worth watching. What a way to start the year. [I’m] sure it was a lousy Christmas for Andrew Liveris,” Young said.

Another industry contact said that 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, the source said. Some of the cuts were achieved through employees taking early retirement from the company.

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 partners have informed us that there will be official written notification of the decision within the next few days,” the release from Dow said. “Dow is extremely disappointed with the decision by the Kuwait government, and is in the process of evaluating its options pursuant to the joint venture formation agreement.

“While disappointed in this outcome, Dow remains committed to its Middle East strategy,” the statement said.

The pullout caps a tumultuous December for Dow, which began on 8 December when the firm announced it would shed 5,000 full-time jobs and 6,000 contractor positions, along with closing 20 plants and temporarily idling 180 more. Global demand softness and a deepening global recession prompted the moves, officials said.

Dow’s nine-month sales for 2008 rose 19% versus the year-ago period to $46.6bn, but the firm’s profit tumbled 13% to $2.1bn. Basic Plastics – including PE and PP – accounted for 23% of Dow’s nine-month sales and 34% of its nine-month pretax profit.

On Wall Street, news of the pullout sent Dow’s per-share stock price down 17% to $15.40 in late trading on 29 December. It had been above $40 in mid-May.
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