By Jack Kaskey
March 8 (Bloomberg) -- Dow Chemical Co. said negotiations to acquire Rohm & Haas Co. under new terms are “going well” and more information will be available tomorrow morning, just as the companies are set to face off in a trial over the stalled merger.
“Settlement talks are going on right now. They are going well,” Matt Henson, an outside spokesman for Dow Chemical with Golin Harris agency, said in a telephone interview. “We’ll have something to tell you in the morning.”
Dow, the largest U.S. chemical maker, agreed in July to pay $78 a share, or $15.3 billion, in cash for Philadelphia-based Rohm & Haas to gain more profitable specialty chemicals used in paints and electronics. Henson said Dow wants Rohm & Haas to accept something other than an all-cash deal so the company can maintain investment-grade credit ratings.
“The right deal is not $78 a share all cash,” Henson said.
Emily Riley, a Rohm & Haas spokeswoman, said she had no update on the talks.
Dow Chief Executive Officer Andrew Liveris has said closing the merger without better financing or asset sales would threaten the combined company’s survival amid flagging chemical markets and the loss of funds from an aborted Kuwaiti venture. A trial is set to begin tomorrow to decide a lawsuit filed by Rohm & Haas seeking to force Dow to complete the takeover.
Dow, based in Midland, Michigan, said on March 6 that lenders agreed to amend a bridge loan for the merger, giving the company until April 2011, or an extra year, to pay off $8 billion of the borrowings. The company has said it didn’t complete the transaction as planned in January because it needed new terms from Citigroup Inc. and other lenders after the joint venture with Kuwait collapsed, depriving Dow of $9 billion.
The total amended loan is $12.5 billion, $4.5 billion of which must be repaid in one year, the company said in a March 6 filing. In addition to the bridge loan, Dow has arranged a $3 billion equity investment from Warren Buffett’s Berkshire Hathaway Inc. and a $1 billion investment by the Kuwait Investment Authority.
On Feb. 12, Dow Chemical cut its dividend by 64 percent, the first reduction in company history, to save $1 billion a year.
Dow’s commercial paper and short-term credit ratings were lowered on March 6 by Standard & Poor’s because of concern the company’s finances might have been hurt if it were forced to acquire Rohm & Haas under the original terms.
Dow’s corporate credit and senior unsecured debt ratings of BBB, two levels above junk, may be lowered if the merger closes on the original terms or if the company is found liable for a large legal judgment, S&P said.
Dow’s stock price has tumbled 79 percent since July 9, the day before the Rohm & Haas acquisition was announced, while Rohm & Haas has gained 42 percent. Dow, which was three times Rohm & Haas’s size by market capitalization, is now valued at about half its acquisition target.
Rohm & Haas solicited bids from Dow and BASF SE after the Haas family, which controls 32 percent of company shares, decided to diversify its investments. Dow’s bid topped BASF’s $75-a-share offer by $3 a share.
“We expect a settlement this weekend because on Monday the trial begins,” Amit Shabi, a partner at Geneva-based Bernheim Dreyfus & Co., which owns Rohm & Haas shares, said March 6. “Extending the bank loans for a year will give them time to sell assets and do it in a less distressed way.”
Liveris has said he may sell assets including the company’s Dow AgroSciences unit, which makes pesticides and develops genetically modified seeds, to help fund the buyout. Syngenta AG, the world’s biggest maker of farm chemicals, said this month it would consider buying the unit. Dow AgroSciences had $4.5 billion in sales last year and is worth $5 billion to $7 billion, HSBC analyst Hassan Ahmed said this month.
In December, Kuwait’s Petrochemical Industries Co. canceled an agreement to buy a 50 percent stake in Dow’s plastics unit. Dow is seeking more than $2.5 billion in damages from Kuwait for the failed venture.
Dow said it is grappling with the worst markets for its products in a generation. Fourth-quarter sales fell 23 percent as sales volumes and prices plunged, prompting the company to reduce factory operating rates to the lowest in more than 25 years.
Dow said in December it is eliminating about 5,000 jobs, or 11 percent of its workforce, permanently closing 20 facilities and idling 180 plants. The contractor workforce is being cut by 6,000. Demand for most products probably will fall in 2009, Liveris said.
Dow, founded in 1897, makes 3,200 products, including plastics, pesticides and Styrofoam, at more than 150 production sites in 37 countries.
Shabi said he’d prefer Rohm & Haas settle the lawsuit, even though the company probably would prevail at the trial in Delaware Chancery Court.
“I thought Rohm & Haas’s case was very strong, but there’s always risk,” Larry Hamermesh, a professor at the Widener University Law School and an expert on Delaware corporate law, said March 6 in a telephone interview. “For anybody, a settlement offers more certainty than trying to roll the dice of litigation.”
Recent rulings in Delaware, such as cases involving Hexion Specialty Chemicals Inc. and Tyson Foods Inc., suggest judges are more willing to order the kind of specific performance Rohm & Haas sought in its lawsuit, Hamermesh said.
In September, Delaware Chancery Court Judge Stephen Lamb ruled Columbus, Ohio-based Hexion didn’t have the grounds to cancel its $6.5 billion offer for Huntsman Corp. because of a slump in the chemical markets. The ruling was short of ordering Hexion to complete the deal.
In the Tyson Foods case in 2001, Chancery Court Judge Leo Strine Jr. ordered that company to complete its $4.7 billion acquisition of IBP Inc. even after claims that financial problems voided the agreement.
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