Rohm and Haas deal value surprises Wall Street

By Euan Rocha

NEW YORK (Reuters) - The 74 percent premium being paid by Dow Chemical Co (DOW.N) for specialty chemical maker Rohm and Haas Co ROH.N has surprised some on Wall Street, especially in light of the slowdown in the U.S. economy.

Dow, the largest U.S. chemical maker, on Thursday said it would acquire Rohm and Haas in an all cash deal for $78 a share, which is a significant premium to the company's closing price of $44.83 on Wednesday on the New York Stock Exchange.

The deal significantly broadens Dow's range of product offerings that feed into a wide range of end markets. However, Rohm and Haas has a sizable exposure to the architectural paint and coatings market in North America, which has been hurt by the slump in the U.S. housing market.

"The amount Dow agreed to pay for it (Rohm and Haas), does not create a lot of near-term value for shareholders," said Michael Judd of Greenwich Consultants.

"I don't think anyone doubts that Rohm and Haas is a great company. But, I just think paying a 25 percent premium to the high in the stock in the current environment -- Well it just makes one scratch ones head," said Judd.

On a conference call, Dow's Chief Executive Andrew Liveris responded to the concerns about the premium being paid.

"A one day premium is a fascinating topic, which I hope in a week or two will be irrelevant. Rohm and Haas' stock has dropped 16 percent during negotiations and that is not the value of Rohm and Haas," said Liveris. "This is a jewel and there aren't many jewels out there."

Dow has said it was targeting acquisitions to expand into a wide array of end markets including paints, coatings, electronic materials, transportation, agriculture and water treatment. In one fell swoop this deal offers Dow a larger piece of the pie in all these end markets.

HSBC analyst, Hassan Ahmed said he did not expect Dow to bid for Rohm and Haas, primarily because of the Haas family's large stake in the company.

"When you have this sort of cross holding structure that becomes almost like a poison pill to make an acquisition. So hence they probably had to pay this massive premium in order to convince the Haas family," said Ahmed.

Haas family trusts, which collectively control about 33 percent of Rohm and Haas' outstanding stock, have indicated their support for the deal.

Rohm and Haas Chief Executive Raj Gupta said the deal only became viable recently, as the Rohm and Haas family trusts expressed an interest in diversifying their holdings and not keeping them concentrated in one stock.

A research note from Jefferies & Co said the deal values Rohm and Haas at 18.5 times 2009 earnings consensus and 10.4 times earnings before interest, taxes, depreciation and amortization (EBITDA). This is a significant premium to the 12.4 times earnings and 6.7 times EBITDA at which the chemical sector trades.

BB&T Capital Markets analyst Frank Mitsch said he has been negative on Rohm and Haas' fundamentals for some time now, as its largest feedstock, propylene, has risen sharply in price, and its major end market, coatings, has been under pressure.

Mitsch also lowered his rating on Dow Chemical's shares to "hold," from "buy," citing concerns that the deal may weigh on Dow's share price in the near term.

Shares of Dow closed on Thursday down $1.44, or 4.2 percent at $35.52 on the New York Stock Exchange. While those of Rohm and Haas rose $28.79, or 64.22 percent to $73.62.

Down said the deal, which is expected to close in 2009, should generate pre-tax cost savings of $800 million per year.

Dow said it has been "appropriately conservative" on the level of savings that it hopes to generate from the deal. It also sees the deal as "meaningfully accretive" to earnings in the second year after it closes.

With higher energy prices and potentially moderating demand, making a really big acquisition isn't necessarily the right thing to do, but making a number of smaller bolt-on acquisitions could make better sense, said Judd of Greenwich Consultants.

"The question is do you need a Ferrari, do your shareholders want to pay for a Ferrari, or are you better off with some sort of hybrid vehicle," said Judd.

(Reporting by Euan Rocha; editing by Carol Bishopric)