Citigroup comments on Dow Chemical (NYSE:DOW) after Parliamentary opposition over the economics of K-Dow has led the Supreme Petroleum Council to cancel the $17.4B JV.
The move comes as a surprise following a re-valuation of the deal this month, and the firm views as a HUGE negative for Dow shareholders. Kuwait’s liberal Popular Action Bloc had been pressuring the Prime Minister to scrap the deal before January 1st to avoid a $2.5B termination penalty.
ROH Implications — The ROH acquisition ($18.5B EV) is expected to be completed in early ‘09, according to ROH’s press release. The deal looked fully-priced when announced in July ‘08 & now appears extremely overpriced given a deep recession and lack of cash from the Kuwait deal. With the credit crisis spreading, the borrowing costs have shot up for most companies globally.
Can ROH Deal Close? — DOW should be looking to protect its shareholders by cutting the ROH deal at a lower price or walking away from the deal by paying a break up fee. However, it may not be easy since there is no "buyer's remorse" clause in the merger deal, nor a MAC clause trigger. If DOW is forced to pay the original price of $78/share, then they will have to reevaluate their thesis on Dow. Recently, Apollo was able to opt out of its $10.6B deal with HUN for a payment of $1B. Firm now expects lengthy negotiations between DOW & ROH.
Notablecalls: I suspect both DOW and ROH will get hit in a major way today. For DOW the worst case scenario would be - ROH closes, but K-Dow does not. That's what we are seeing ATM.
The K-Dow deal was expected to increase Dow’s financial flexibility and increase the likelihood of the ROH merger concluding efficiently. So it's logical to see ROH get hit.
Where should/could ROH trade?
ROH was trading around $45 when the deal news hit back in July. Yet, if one takes a look at the peers - NCX was trading around $23-$24 in July and now trades around $4-$5.
I would not be surprised to see ROH hit $45 today. If the deal breaks down the stock will be headed toward $30 level.
How to play DOW?
I suspect we may see some downgrades in the n-t as most analysts were pretty high on the K-Dow deal. I see a 6-10% downside move in DOW. Let's see if I'm right about this one.
The move comes as a surprise following a re-valuation of the deal this month, and the firm views as a HUGE negative for Dow shareholders. Kuwait’s liberal Popular Action Bloc had been pressuring the Prime Minister to scrap the deal before January 1st to avoid a $2.5B termination penalty.
ROH Implications — The ROH acquisition ($18.5B EV) is expected to be completed in early ‘09, according to ROH’s press release. The deal looked fully-priced when announced in July ‘08 & now appears extremely overpriced given a deep recession and lack of cash from the Kuwait deal. With the credit crisis spreading, the borrowing costs have shot up for most companies globally.
Can ROH Deal Close? — DOW should be looking to protect its shareholders by cutting the ROH deal at a lower price or walking away from the deal by paying a break up fee. However, it may not be easy since there is no "buyer's remorse" clause in the merger deal, nor a MAC clause trigger. If DOW is forced to pay the original price of $78/share, then they will have to reevaluate their thesis on Dow. Recently, Apollo was able to opt out of its $10.6B deal with HUN for a payment of $1B. Firm now expects lengthy negotiations between DOW & ROH.
Notablecalls: I suspect both DOW and ROH will get hit in a major way today. For DOW the worst case scenario would be - ROH closes, but K-Dow does not. That's what we are seeing ATM.
The K-Dow deal was expected to increase Dow’s financial flexibility and increase the likelihood of the ROH merger concluding efficiently. So it's logical to see ROH get hit.
Where should/could ROH trade?
ROH was trading around $45 when the deal news hit back in July. Yet, if one takes a look at the peers - NCX was trading around $23-$24 in July and now trades around $4-$5.
I would not be surprised to see ROH hit $45 today. If the deal breaks down the stock will be headed toward $30 level.
How to play DOW?
I suspect we may see some downgrades in the n-t as most analysts were pretty high on the K-Dow deal. I see a 6-10% downside move in DOW. Let's see if I'm right about this one.
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