UPDATE 4-Dow, Rohm shares fall on concern over deal

(Adds S&P, Moody's downgrade in paragraphs 20 and 21)

By Michael Erman and Jui Chakravorty Das

NEW YORK, Dec 29 (Reuters) - Shares of Dow Chemical (DOW.N) and Rohm & Haas ROH.N plunged more than 16 percent on Monday after Kuwait scrapped a joint venture with Dow, potentially upsetting its plans to buy rival Rohm & Haas. [ID:nLS308821]

Dow, the largest U.S. chemical company, could be hurt even if it goes ahead with the Rohm & Haas buy, as it would be saddled with a large debt load from the deal, analysts said.

Dow had planned to use proceeds from the joint venture with Kuwait's state-run Petrochemical Industries Co to repay a large part of the debt financing for the $15.3 billion Rohm & Haas acquisition.

Dow was to receive $9 billion from the Kuwaiti deal.

Analysts said Dow now would be under pressure to renegotiate its bid for Rohm & Haas or, if possible, walk away from the deal.

Midland, Michigan-based Dow agreed in July to buy Rohm & Haas for $78 a share to broaden its specialty product offerings. The deal carries a termination fee of $750 million payable to Rohm & Haas.

HSBC analyst Hassan Ahmed said Dow should be looking for ways to extricate itself from the deal. Without the Kuwaiti joint venture, Dow would have to tap into difficult credit markets to be able to shoulder the transaction, he said.

Dow's transformation plan is built on two legs: the $17.4 billion Kuwaiti joint venture and the Rohm & Haas deal, Ahmed said.

"When one leg of the two-leg story has fallen off, how can they stand on just the Rohm & Haas deal?" he asked.

In the past, Dow has said it could close the Rohm & Haas deal without the funds from the Kuwaiti joint venture.

To walk away from the deal, Dow would likely have to prove that Rohm & Haas' business had suffered a "material adverse event" since the deal was signed.

Dow declined to comment on whether the joint venture's collapse would affect its plan to buy Rohm & Haas.

Rohm & Haas said in a statement on Sunday that completion of Dow's joint venture was not a condition for the closing of the acquisition. It said it was working to complete the deal early in the new year.

DOW'S DIFFICULTIES

Dow had planned to use part of the proceeds to pay off a one-year, $13 billion bridge loan by a group of banks led by Citigroup, Merrill Lynch and Morgan Stanley, who advised the company on the Rohm & Haas deal.

Citigroup and Merrill also advised Dow on the Kuwaiti joint venture.

Moreover, Dow and other chemical companies are struggling because of recession in most developed countries and a sharp slowdown in emerging economies.

The company said earlier this month it would close 20 facilities, divest several businesses and cut 5,000 jobs to cope with the slump.

Dow is eligible to collect up to $2.5 billion in termination fees from the breakup of the Kuwaiti deal.

But Barclay's Capital analyst Sergey Vasnetsov said he does not expect the company to recover a meaningful amount from Kuwait because of Dow's need to maintain friendly relations with the country.

Standard & Poor's and Moody's Investors Service both cut their ratings on Dow on Monday and left their ratings on review for further downgrade.

The failed deal "substantially increases the likelihood that Dow's credit profile will be weakened in any reasonable scenario," Moody's said in a statement. [ID:nN29320429]

Shares of Dow closed down $3.60 or 19 percent at $15.32, and Rohm & Haas fell $10.22 or 16.1 percent to $53.34, both on the New York Stock Exchange.

Kuwait's decision spurred option traders to buy put options in Dow.

Such options perform well if a company's shares drop. In Rohm, option traders were also buying puts, particularly those giving holders the right to sell shares at $45 through January, which coincides with the pre-deal share price back in July.

"Options traders seemed to be focusing on a worsening environment for Dow Chemical since Dow has lost the prospect of any cost-saving benefits from the deal with Rohm after Kuwait scrapped its joint venture with Dow," said Andrew Wilkinson, senior market analyst at Interactive Brokers Group in Greenwich, Connecticut.

"One aspect of this joint venture with Kuwait would have been production of higher-margin specialty chemicals. While it was bad news for Rohm, it seems that option investors are taking it as worse news for Dow."

If the acquisition does fall through, it would join a long list of deals withdrawn in 2008 amid a lack of available credit and plunging stock markets, including BHP Billiton Ltd's (BHP.AX) $188 billion offer for Rio Tinto Plc (RIO.L) and Hexion's $6.5 billion bid for chemicals firm Huntsman Corp. (HUN.N) (Additional reporting by Doris Frankel in Chicago; Editing by Matthew Lewis and John Wallace)