Is Dow Chemical Rushing Rohm & Haas Deal?

A report says that Dow could close the deal this week. Meanwhile, a negative chorus grows against it.
Author:
Publish date:

Why is

Dow Chemical

(DOW) - Get Report

possibly hurrying to write a $15.3 billion check for

Rohm & Haas

(ROH)

when many observers believe it's worth less than half that amount?

According to a report Monday evening by

The Associated Press

, Dow plans to release a statement early Tuesday on the deal, and the merger with the company could close as soon as Thursday, the

AP

reported. Rohm & Haas said it will not be issuing a statement and that it does not expect to be affected by Dow's release.

The Midland, Mich.-based company could announce U.S. regulatory approval Tuesday, with European assent and a closing following on Thursday, Greenwich Consultants analyst Michael Judd said.

Dow has an incentive to close the deal by the weekend. The $78-per-share purchase price increases daily if the deal does not close by this Saturday.

"There's no reason Dow shouldn't wrap this thing up," Judd said. "Everybody thinks this thing is going to close this week."

Dow's potential move could be attributable to a deadline in its contract with Philadelphia-based Rohm & Haas that would require Dow to make steep penalty payments to Rohm if it were missed. However, a slew of analysts recommended that it ignore the deadline and back away from the deal entirely.

If global economic paralysis weren't a good enough reason for Dow Chemical to rethink the merger with Rohm & Haas, it got others on Dec. 29, when Dow learned that Kuwait was walking away from a petrochemical joint venture that was supposed to generate more than $7 billion in free cash flow for Dow.

When Dow agreed to buy Rohm & Haas for $78 a share last June, it assumed that a big chunk of the cost would be covered by funds coming in from the Kuwait venture, K-DOW.

The deal was ambushed on two fronts last week when JPMorgan Chase's Dow Chemical analyst and Credit Suisse's Rohm & Haas analyst both filed reports that criticized the merger.

In a note to clients, JPMorgan analyst Jeffrey J. Zekauskas lowered his 2009 Dow Chemical earnings forecast to $1.50 a share from $2 and slashed his price target for the firm's stock to $15 a share from $20.

Zekauskas said that his hand was forced by falling demand for Dow's plastics from the sour economy as well as the likelihood that Dow will have to ask bank lenders to fill the sudden void caused by the dissolution of its Kuwaiti partnership.

Dow Chemical is no stranger to the world's primary credit markets, but it won't be getting a neighborly welcome when it visits the bank in 2009. Credit markets are still staggering from the hangover caused by their own financial meltdown.

The company brief on Rohm & Haas that analyst John P. McNulty at Credit Suisse filed on Dec. 29 won't make those trips to the lender any easier for Dow. McNulty said that Rohm & Haas shares, currently trading around $64, would probably be selling in the $32-$35 range if the company weren't under contract by Dow for $78 a share.

Shares of Dow Chemical closed Monday at $15.05, down 36 cents, or 2.34%. Rohm & Haas shares closed at $63.82, down 94 cents, or 1.45%.

Copyright 2009 TheStreet.com Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed. AP contributed to this report.