Intellectual Thoughts by Sanjay Panda: Dow Chemical May Become Takeover Target

Dow Chemical May Become Takeover Target

Dow Chemical co, may become a takeover target even though Chief Executive Officer Andrew Liveris said he isn't interested in selling the largest U.S. chemical maker. Liveris fired executives Pedro Reinhard and Romeo Kreinberg yesterday for holding unauthorized talks with possible private- equity bidders. Shares of Dow jumped 2 percent yesterday, giving the company a market value of $44.1 billion. Shareholders may be open to a buyout. Dow had gained 8.5 percent in the 12 months before April 8, when the possibility of a buyout was reported in Britain's Sunday Express newspaper, trailing the 16 percent gain for the Standard & Poor's 500 Chemicals Index.
The shares trade at 10.8 times annual earnings, the lowest in the 13-member index, compared with 17 times for DuPont Co. and 37 times for Monsanto Co. Dow's profit excluding items, $3.82 a share last year, may drop to $2 to $3 a share by 2010. Sales totaled $49.1 billion last year.
U.S. buyout firms, including Kohlberg Kravis Roberts & Co., were joining with Middle East investors to prepare a takeover bid of at least $50 billion, according to the Sunday Express. Liveris, dismissed the report at the time, saying Dow had held no merger talks, and the board issued a statement saying it backed the CEO's strategy. The shares rose 4.9 percent nonetheless. The cost of five-year credit-default swaps on Dow debt more than tripled since February on investor expectations of heightened risk. Contracts on $10 million of Dow debt increased $1,000 today to $55,500, close to a two-year high, according to CMA Datavsion. Investors use credit-default swaps as an alternative to bonds to speculate on corporate indebtedness.

Kreinberg, yesterday denied the company's accusations that he held unauthorized talks with banks and foreign governments about a planned takeover, calling the claims unfounded and unsubstantiated.'' Reinhard, 61, was Dow's chief financial officer for 10 years. He said the two men were getting legal advice and declined to comment further.Dow spokesman Chris Huntley, responding to Kreinberg's comment, said, ``We have the information from a highly reliable source that would know what was going on, and who we have absolute confidence in.'' He reiterated Liveris's comments that the company has had no talks to be acquired.

A group of private-equity firms may offer to buy parts of the company, the Financial Times reported on Jan. 19. The stock surged 5.6 percent on March 15 on speculation Dow would combine assets with India's Reliance Industries Ltd. The Times of India said on Feb. 26 that Reliance may bid for Dow.

Dow may attract Middle East bidders that want to diversify away from oil and natural gas, Butler Wick's Batcheller said. The Express reported that at least half the financing for the KKR bid would come from investors in Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates and Oman.

The company's ratio of net debt to capital is 28 percent, a level that adds to its takeover appeal। Even if Dow isn't sold, the company may use the cash to expand production of faster-growing specialty chemicals.Other analysts said a takeover of Dow is unlikely. Goldman Sachs Group analyst Robert Koort said the premium a hostile bidder would need to pay for Dow wouldn't justify the returns, given that chemical profits are in a cyclical decline.


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