Kuwait Petroleum Pull Out Of JV Deal With Dow

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Kuwait Petroleum Corporation (KPC) has decided to cancel a deal with Dow Chemicals to set up K-Dow Petrochemicals, a 50:50 US$17.4 billion joint venture to which Dow was due to transfer 5 units manufacturing and marketing a wide variety of “commodity” products like polyethylene, polypropylene, polycarbonate, ethyleneamines and ethanolamines and research centres related to these products. KPC’s investment was due to be made through its subsidiary Petrochemical Industries Company (PIC). The JV was expected to generate annual revenues of over US$11 billion and employ more than 5,000 people worldwide. The deal was to become effective from January 1, 2009. If the deal had not been scrapped before then, KPC would have been liable to pay a penalty of up to US$ 2.5 billion.
The original deal was announced in December 2007 and the JV was then valued at US$ 19 billion. The idea was to transfer the above business units to the JV to take advantage of cheap feedstock available in Kuwait as margins in these businesses were under severe pressure. About a month ago, the deal was devalued by 8 per cent to US$17.4 billion to account for the global economic crisis and the drop in valuations of petrochemicals businesses.
The cancellation of the deal was due to severe opposition from some Kuwaiti parliamentarians who claimed that the project was no longer economically viable due to a slump in petrochemical demand and due to the global financial meltdown.

The move comes as a severe setback for Dow in its proposed restructuring of its businesses so as to focus on specialty materials and performance products. It will also substantially constrain its completing the acquisition of Rohm & Haas, which it had agreed to do for US$ 15.3 billion in July 2008. A large part of the KPC contribution to the JV was expected to be used to fund this acquisition. Dow will be assuming US$ 13 billion in debt once the acquisition is completed in early 2009. The combined entity is due to overtake BASF as the world’s largest chemicals company. Dow had also announced earlier this month that it would cut 5,000 full-time jobs, close 20 facilities and work aggressively to divest non-strategic businesses to cope with the present global economic crisis. It is also temporarily curtailing operations at 180 plants worldwide and reducing contractor workforce by 6,000.

Dow had agreed to pay US$ 78 per share, a massive 74 per cent premium over Rohm & Haas’ stock price of US$ 44.83 per share as on July 9, 2008. It is now expected that Dow might have no option but to go back and re-negotiate this deal. According to industry analysts, the acquisition is likely to be re-negotiated at under US$ 70 per share.  The falling through of K-Dow is, however, unlikely to derail the Rohm & Haas acquisition as that has been backed by substantial commitment in preferred securities from Warren Buffett’s Berkshire Hathaway Group (US$ 3 billion) and debt financing from Citigroup, Merrill Lynch and Morgan Stanley.

The share prices of both Dow and Rohm & Haas have dropped by almost 19 per cent and 16 per cent respectively since yesterday and both Standard & Poor’s and Moody’s have downgraded their investment ratings for Dow. However, both companies have re-affirmed their intention to go through with the proposed merger in early 2009 and have stated that the collapse of the K-Dow venture is not a closing condition. Dow have also announced that though they are “extremely disappointed” with this development, they are still committed to the strategy of tying up cheap petrochemical feedstock in the Middle East and they would now investigate alternative options to take this forward.

The crisis is also likely to delay the proposed joint venture between India’s leading petrochemical company Reliance Industries and Rohm & Haas for the setting up of a 200,000 MT/year acrylic monomer complex at Jamnagar in Gujarat in Western India, the MOU for which was signed in March 2007.