Kuwaiti Government is Better Off Without the Dow Deal

Joint ventures, and mergers & acquisitions get cancelled, or renegotiated all the time, especially during poor market conditions. One recent and highly publicized example is Apollo Management’s decision to cancel its takeover of Huntsman Corp. With the same token, Kuwait has every right to scrap any business deal that it deems uneconomical in current markets.

Dow-Kuwaiti deal specifies that the Kuwait government to provide $9 billion to acquire Rohm & Hass Co. The $78 per share offer was announced in July 2008, when oil prices were trading at $140 / b. However, since then oil prices dropped by 71% while S&P500 Index dropped by 30%. Clearly this requires a revision of any deal.

So if we apply a current sector multiple of 10 times, Rohm & Hass’s share price should be $32 per share, a 59% discount from offer price. Thus, in a renegotiated deal, the Kuwaiti government should not contribute more than $3.7 billion.

Moreover, Dow’s contribution to the joint venture is in the form of plans and equipments. No doubt that the value of these plans & equipment deteriorated rapidly since the deal was agreed upon earlier this year. In this market conditions where cash is king, a current $9 billion cash is worth more than $9 billion cash in early 2008 while the reverse is true for Dow’s plans & equipments. The current deal is over-priced. Kuwaiti officials made the right choice by scrapping the deal.

And the Kuwaiti government should not pay the total rumored $2.5 billion in penalty payments for cancelling the deal. The $2.5 billion represents 28% of the original deal value, and no reasonable legal document would stipulate such high fees. Apollo paid $425 million in breakup fees to Huntsman which represents 6.5% of the deal value. If the Dow-Kuwaiti documents stipulate such high fees, then the arrangers of the deal should be reprimanded and relieved from their duties and the penalty payments should be renegotiated.

Even if Kuwait defaults on the penalty payments, international companies will continue to invest in Kuwait. Just ask the Russians and the Argentines. Russia devalued its currency in 1998 and tons of investors lost money, but they kept on coming back later. In 2001, Argentina defaulted on its debt and forced lenders to accept a 75% loss of their money. In less than 2 years, investors returned to Argentina and bought its restructured debt again. Money has a short memory.