DEALTALK-Dow has limited leverage in Rohm & Haas deal

Tue Dec 30, 2008 9:44pm GMT

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By Michael Erman

NEW YORK Dec 30 (Reuters) - Dow Chemical Co (DOW.N) may be looking to coax Rohm & Haas ROH.N back to the table to renegotiate its $15.3 billion takeover of the specialty chemicals company, but the No. 1 U.S. chemical company has limited leverage.

The deal signed by the two companies in July heavily favors Rohm & Haas, and Rohm's incentive to renegotiate the $78-a-share cash bid is limited.

The deal came under question earlier this week, when Kuwait scrapped a $17.4 billion joint venture whose proceeds Dow had planned to use to pay down some of the resulting debt.

While Dow still has the financing necessary to complete the transaction, some analysts and investors have questioned whether it would want to do so without the Kuwaiti cash.

But the terms of the deal leave Dow with very limited recourse, said Joel Greenberg, co-chair of law firm Kaye Scholer LLP's corporate and finance department.

"Looking at the agreement quickly, the only course that might give them some way out is if the antitrust authorities raise a big problem," he said. "Even there, they've got to be willing to litigate for a while with the government."

Dow could also try to prove that Rohm had suffered a material adverse change to its business since signing the deal, but the merger agreement limits the circumstances under which Dow can claim such a change took place.

Under the terms of the deal, Dow can't claim the financial crisis or weakness in the specialty chemicals sector in general caused such a hypothetical deal-breaking change.

MATERIAL CHANGE?

Moreover, a ruling in a previously contested chemicals deal -- Hexion's scuttled takeover of Huntsman Corp (HUN.N) -- could make it even less likely that Dow would try to prove that Rohm had suffered such a change.

"In light of the opinion in Huntsman, I think buyers need to be very wary of willfully breaching an agreement" said Morton Pierce.

A Delaware Chancery Court judge ruled that if Hexion -- controlled by private equity firm Apollo Management LP -- walked away from its agreement to buy Huntsman, it could be subject to damages above and beyond the breakup fee in the merger agreement.

"After that decision, I think people are very, very cautious about walking away from a deal," Pierce said.

Dow offered to buy Rohm & Haas in July, before credit markets froze and the stock market collapsed. Rohm & Haas was hotly pursued, which led to both a steep 74 percent premium for the company and an airtight merger agreement.

Dow has not indicated that it is looking to walk away from the deal. But earlier in December, Dow CEO Andrew Liveris said the company had "examined all sorts of ways to look at the Rohm & Haas transaction in the context of today's economic circumstances."

Both companies declined to comment.

Some of the largest banks in the business could also be hurt if the Rohm & Haas deal falls apart. Citigroup (C.N) and Merrill Lynch MER.N, for instance, advised Dow on both the Kuwaiti deal and the Rohm & Haas deal. (To see a full list of advisors, go to here)

Credit Suisse analyst John McNulty said he believed the deal would likely close at or near the $78-a-share mark, but the stock could remain under pressure given the failure of other chemicals deals and the possibility of lengthy litigation.

Shares of Rohm & Haas fell sharply on Monday after Dow's Kuwaiti joint venture fell through. The company's shares recovered somewhat on Tuesday, rising $6.36, or 11.9 percent, to close at $59.70, but are still well below the deal value.

Nevertheless, the company could still come out on top.

"They were clearly competently represented," said Kaye Scholer's Greenberg. "I'd tell them to hold steady." (For more M&A news and our DealZone blog, go to www.reuters.com/deals) (Reporting by Michael Erman; Editing by Gary Hill)

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