NEW YORK Dow Chemical Co (DOW.N) said on Thursday it would buy rival Rohm and Haas Co ROH.N for $15.3 billion in a move to broaden its product offerings in higher margin markets such as paints, coatings and electronic materials.
Dow has long been among the largest global makers of commodity chemicals such as those used to make plastics, but that business is typically cyclical and yields thinner margins than specialty chemicals.
Dow's chief executive Andrew Liveris has advocated a strategy of beefing up its specialty business, whose end markets include paint, coatings, electronics, agriculture, transportation and water purification. The Rohm and Haas deal achieves this goal at one fell swoop.
"It's a massive transformation," said Morningstar analyst Ben Johnson. "Dow has been for a long time talking about how they are committed to having more stable earnings throughout an entire economic cycle and this is evident of their commitment to that goal," said Johnson.
The all-cash deal for $78 per share is a 74 percent premium compared to Rohm and Haas Co's closing price of $44.83 per share on Wednesday on the New York Stock Exchange. Including Rohm & Haas' debt of $3.5 billion, the deal would be valued at $18.8 billion.
Financing for the acquisition includes an equity investment by billionaire Warren Buffett's Berkshire Hathaway (BRKa.N) and the Kuwait Investment Authority in the form of convertible preferred securities for $3 billion and $1 billion, respectively.
Dow has also secured $13 billion debt financing from Citigroup (C.N), Merrill Lynch MER.N and Morgan Stanley (MS.N). It hopes to pay down some of this debt immediately after receiving the proceeds from its planned joint venture with Kuwait Petroleum Corp.
The Rohm and Haas deal comes seven months after Dow sold a significant portion of its plastics assets into a joint venture with Kuwait Petroleum Corp for $9.5 billion.
That deal, which is expected to close in toward the end of 2008, is intended to cut Dow's exposure to the commodity chemicals business.
Shares of Dow were down $1.77, or 5.2 percent, at $32.17 in afternoon trade on the New York Stock Exchange.
The deal may weigh on Dow over the near term, according to BB&T Capital Markets analyst Frank Mitsch, who lowered his rating on Dow's stock to "hold" from "buy".
"Although we expect to see modest dilution in the near term, we can readily see that in the long term after various synergies are realized this transaction will likely be positive," Mitsch wrote in a note to investors.
The deal, which is expected to close in early 2009, should generate pre-tax cost savings of at least $800 million per year.
Dow said the deal would be "meaningfully accretive" to earnings in the second year after it closes. Liveris also said that Dow has been "appropriately conservative" on the level of savings that it hopes to generate from the deal.
Liveris expects the combined company to earn more than $4 a share by the time the industry faces its next market trough, which analysts expect to take place in about 2010.
Dow is also targeting earnings of over $10 a share during the next industry peak, which is expected to take occur in 2015.
INVESTMENT GRADE RATING
Liveris said Dow has received early indications from credit ratings agency Moody's that its debt will remain investment grade following the deal, as the company plans to retire a good portion of the debt financing by using the proceeds from its joint venture agreement with Kuwait Petroleum.
Dow is one of the highest rated North American chemical makers. Moody's rates Dow Chemical "A3,", while Standard & Poor's and Fitch rate it "A-minus."
For Berkshire, which will become Dow's largest shareholder, the deal is similar to the role it played in helping candy maker Mars Inc to buy chewing gum company Wrigley Jr Co WWY.N for $23 billion.
HSBC analyst Hassan Ahmed said Buffett's investment in Dow would a confidence booster and a positive signal for other investors in the chemical maker.
Dow will create an advanced materials business unit at Rohm and Haas' current headquarters in Philadelphia that will have a total annual revenue of nearly $13 billion, upon completion.
Two Rohm and Haas directors will join the Dow's board, bringing the total size of Dow's board to 14.
Shares in Rohm & Haas jumped $29.17, or 65 percent, to $74 a share in afternoon trade on the New York Stock Exchange.
(Reporting by Euan Rocha and Matt Daily; Editing by Derek Caney)