Dow Chemical (DOW) and Rohm & Haas (ROH) have confirmed they are back at the bargaining table. To accentuate the “a deal is close” scenario, Dow announced in an 8K filing that they have renegotiated their loans with the syndicate and the key point is that the loan can be extended for an additional year under certain conditions.
On September 8, 2008, The Dow Chemical Company (the “Company”), as borrower, entered into a Term Loan Agreement (the “Original Agreement”) with the lenders party thereto and Citibank, N.A., as administrative agent for the lenders, in order to partially finance the acquisition by the Company (the “Acquisition”) of Rohm and Haas Company (the “Target”), to retire certain debt of the Target and to pay related costs and expenses. On March 5, 2009, the parties to the Original Agreement entered into a First Amendment to Term Loan Agreement (the “First Amendment”) in order to amend the Original Agreement (as so amended, the “Loan Agreement”).
Under the Loan Agreement, the lenders have committed to lend to the Company an aggregate principal amount that will not exceed the sum of each of their commitments, the total amount of which was reduced by $500,000,000 to $12,500,000,000 pursuant to the First Amendment, in a single term borrowing on the date of the closing of the Acquisition. The Loan Agreement will mature on the earlier of (a) the first anniversary of the closing date and (b) April 14, 2010; provided, however, that the original maturity date of the Loan Agreement may be extended to the date occurring one year following the original maturity date, at the option of the Company, subject to the satisfaction of certain conditions precedent, including (i) the absence, since December 31, 2008, of a material adverse change in the financial position or operations of the Company and its consolidated subsidiaries, considered as a whole (except for the Acquisition and the financing thereof and except for any changes disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008; provided that any changes or developments relating to matters so disclosed (and the effects thereof) that arise after December 31, 2008 may be taken into account in determining whether a material adverse change has occurred), (ii) compliance with the total leverage ratio covenant described below as of the original maturity date, if such covenant is applicable on such date, (iii) the reduction of the aggregate principal amount of the loans under the Loan Agreement to $8,000,000,000 or less, and (iv) the payment of an extension fee equal to 2% of the aggregate principal amount of the outstanding loans after giving effect to the extension.
The Loan Agreement permits loans bearing interest at a rate per annum equal to either the prime rate or LIBOR plus, in each case, a margin that varies based on the Company’s credit rating (the “Applicable Margin”); provided, however, that if the original maturity date of the Loan Agreement is extended as described in the preceding paragraph, then the Applicable Margin shall increase, as set forth in the Loan Agreement, on the date of extension, on the 90th day following such date and on each successive 90th day thereafter.
The Company has agreed to pay to the lenders a structuring fee equal to 1.25% of the aggregate amount of the lenders’ commitments. Additionally, under the Loan Agreement, the Company is obligated from time to time to pay certain duration fees to the lenders, as set forth in the Loan Agreement. Higher rates will apply to certain of these fees (i) unless, on or prior to the 90th day following the date of the closing of the Acquisition, the Company consummates one or more sales of certain equity interests or equity-linked securities for which it receives aggregate gross cash proceeds of at least $1,500,000,000 (calculated, in the case of equity-linked securities, based on the amount of “equity credit” accorded thereto by certain rating agencies) (a “New Equity Issuance”) or (ii) if a New Equity Issuance does occur on or prior to such 90th day following the date of the closing of the Acquisition, but the outstanding indebtedness under the Loan Agreement has not been reduced to the extent specified under the Loan Agreement.
I would still be very surprised if this went to trial. The benefit of the deal to the 3 principle shareholders of Rohm and Haas will not, under any circumstances win out over the potential job losses in this economy a forced merger would likely cause.
That is why Rohm is back at the table. Now the key is the loan extension. Dow can extend the $12.5 billion loan an additional year provided the keep their credit rating investment grade. Forcing the merger now under the original terms would void that. Also, Dow has cut the dividend and said it will raise another $3 billion through debt sales. In short they have taken away any argument Rohm has claiming Dow has not sought alternative avenues in which to complete the deal. They clearly have.
Yes I know Rohm has an “iron clad” agreement. But, in a Delaware Court the Judge decides what is “equitable” or “fair” for both parties. He is required to find a solution that is “best for all parties”, employees included. He has already told Dow and Rohm to “find a business solution” more than once. That translates to: “Dow, you are going to do this deal” and “Rohm, it won’t be now or under the original terms”.
This is why Rohm has decided to talk, even they now realize the outcome they face in court in far less favorable than it was a month ago.
Disclosure (“none” means no position):Long DOW
Visit the ValuePlays Bookstore for Great Investing Books