Joint Venture for Dow Chemicals Dissolves - December 29, 2008

In an announcement made early Monday morning, the Kuwaiti government confirmed reports that a joint venture with U.S. chemical giant Dow Chemicals (DOW) has been banished. The proposed deal was signed last month and was valued at $17.4B, and would have created the petrochemical joint venture had it not been for the deteriorating global financial crisis.

The agreement was presented for Kuwait state-owned Petrochemicals Industries Co. to front a $7.5B stake in a 50-50 venture with Dow to be named K-Dow Petrochemicals. If Kuwait had waited until after the New Year, the country would have been liable for a $2.5B penalty related to a breech of contract.

The new company, had it succeeded, would have been brought to market such products as polyethylene, polypropylene, and polycarbonate. These products are the main chemicals used to manufacture such items ranging from plastic bottles to compact discs to computers and agricultural compounds.

The strength of the venture began to show signs of weakness as the price of crude took a nosedive since hitting its record highs in July. Since then, the price of crude has fallen more than $100 a barrel, which has put tremendous pressures on Kuwait, along with their Arab neighbors.

With crude’s price plummeting, the Kuwaiti stock exchange has also taking serious hits, losing nearly 35% of it total value since the beginning of the year. Dow has not fared much better since the beginning of ’08. Beginning in the upper $30s, Dow’s stock is currently trading in around $15, down 60% from January 1, and nearly 65% from its 52-week high of $43.43 set back on May 16.

Today’s events could have dire consequences on Dow’s financing capabilities of a proposed takeover of Rohm & Haas (ROH), which was announced in July for a price tag of $18.8B. Analysts now believe that Dow will return the negotiation table to seek a lower acquisition price for Rohm & Haas.

In respect to the joint venture, Dow was planning to use $9B in proceeds from the deal to fund the purchase of Rohm & Haas. However, a representative from Rohm & Haas acknowledged that the failed joint venture would in no way affect attempts for the two companies to merge.

Dow officials went on to say that they were "extremely disappointed with the decision by the Kuwait Government, and is in the process of evaluating its options pursuant to the Joint Venture Formation Agreement." The Dow representative went on to add that they "remain committed to its Middle East Strategy."

Without expected funding from the joint venture, Dow must rely on previous measures in which the company enacted a few weeks ago. Having reduced their workforce by some 5,000 employees, Dow has also stated that they will be shutting down 20 facilities and divest non-strategic businesses in order to cope with the current economic conditions.

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