ValuePlays

Let’s look closer at the Dow Chemical (DOW), Rohm & Haas (RHM) deal

First the video’s. Dow CEO Andrew Liveris on CNBC

Part 1:

Part 2:

Important things to note:

– Buffett wanted an investment in Dow Chemical BEFORE this deal came to the table after meeting Liveris and hearing about what is happening at Dow.
– The $3 billion convertible Berkshire (BRK.A) converts in 5 years.
– The deal, in keeping with Liveris’s stated acquisition criteria is accredive withing two years.

Rohm & Hass (ROH):
Is the world’s largest producer of acrylic paint ingredients and also makes chemicals used in adhesives, packaging materials and personal-care products. Dow said the unit that will include Rohm & Haas’s business will have annual revenue of about $13 billion. Dow had $53.5 billion in sales last year.

The purchase will have pretax cost synergies of at least $800 million per year from increased purchasing power for raw materials, supply chain improvements and the elimination of redundant corporate services and governance, Dow said.

With the collective impact of these two deals, performance products and advanced materials will represent 69 percent of Dow’s total sales, on a 2007 pro forma basis, compared with 51 percent prior to these transactions. EDBITDA will change from 51% performance to 62%.

Debt to equity will remain under 40% after the deal. Note: Some of the proceed from the Kuwait deal will pay off initial debt used for the transaction so the 40% number is a post both transactions number. Dow has $1.6 billion in cash as of the last quarter and $9.5 billion coming. $4 billion will come from Berkshire and Kuwait meaning even without any additional pure (convertible aside) debt, Dow would retain $1 billion in cash on its books post deal.

Bottom line, Dow retains tremendous financial flexibility post deal. Look at it this way, do we really think Buffett would pony up $3 billion for a convertible that would convert flat or at a loss? Would he put up the cash of he thought the deal would cripple Dow or its earning power? Think about it… Clearly Buffett sees tremendous upside for both a Dow with and without Rohm & Hass.

In March of this year I said:

“Berkshire’s (BRK.A) Warren Buffett has always said that “price is what you pay, value is what you get”. It is one of my personal favorites because it reminds us that the price of a stock and what you are getting for that price are not always commensurate. There are times you pay in excess of what you are receiving in value and times you pay far less.

This is one of those times.

I have no idea what the price of Dow’s stock will be in the future. I do know that, buying the stock at its current levels, yielding a growing 4.5% is a wise move long term. With earnings expectations above $3.50 for 2010 (the next expected trough), Dow currently sits at about 10 times those earnings. Should Liveris’s “well north” mean $3.90 a share or higher, then we have a 4.5% yielding company sitting at 8 to 9 times earnings…

All this does not take into account the endless possibilities of $9.5 billion coming into the bank this year….”

It would appear Warren agrees….

Now, much is being said today about the premium Dow is paying. Let’s look closer.
The deal is only a 47.9% premium to Rohm and Haas 60-day average price and a 28.7% premium to its 2008 closing high. Liveris did point out the the share price of Rohm dropped 16% during the month the deal came together. If it had just stayed flat, the “premium wretching” we have been hearing about would be nil. With Rohm & Haas, Dow is now committing to industry trough (2010-2011) EPS of $4 a share, up 14% from the previous $3.50 a share announced earlier this year. Let’s not forget the EPS for the trough is an “in the bag” estimate, expect superior results.

View Dow pdf. presentation on the deal:

View Dow Press Release

Disclosure (“none” means no position):Long Dow, none

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Let’s look closer at the Dow Chemical (DOW), Rohm & Haas (RHM) deal

First the video’s. Dow CEO Andrew Liveris on CNBC

Part 1:

Part 2:

Important things to note:

– Buffett wanted an investment in Dow Chemical BEFORE this deal came to the table after meeting Liveris and hearing about what is happening at Dow.
– The $3 billion convertible Berkshire (BRK.A) converts in 5 years.
– The deal, in keeping with Liveris’s stated acquisition criteria is accredive withing two years.

Rohm & Hass (ROH):
Is the world’s largest producer of acrylic paint ingredients and also makes chemicals used in adhesives, packaging materials and personal-care products. Dow said the unit that will include Rohm & Haas’s business will have annual revenue of about $13 billion. Dow had $53.5 billion in sales last year.

The purchase will have pretax cost synergies of at least $800 million per year from increased purchasing power for raw materials, supply chain improvements and the elimination of redundant corporate services and governance, Dow said.

With the collective impact of these two deals, performance products and advanced materials will represent 69 percent of Dow’s total sales, on a 2007 pro forma basis, compared with 51 percent prior to these transactions. EDBITDA will change from 51% performance to 62%.

Debt to equity will remain under 40% after the deal. Note: Some of the proceed from the Kuwait deal will pay off initial debt used for the transaction so the 40% number is a post both transactions number. Dow has $1.6 billion in cash as of the last quarter and $9.5 billion coming. $4 billion will come from Berkshire and Kuwait meaning even without any additional pure (convertible aside) debt, Dow would retain $1 billion in cash on its books post deal.

Bottom line, Dow retains tremendous financial flexibility post deal. Look at it this way, do we really think Buffett would pony up $3 billion for a convertible that would convert flat or at a loss? Would he put up the cash of he thought the deal would cripple Dow or its earning power? Think about it… Clearly Buffett sees tremendous upside for both a Dow with and without Rohm & Hass.

In March of this year I said:

“Berkshire’s (BRK.A) Warren Buffett has always said that “price is what you pay, value is what you get”. It is one of my personal favorites because it reminds us that the price of a stock and what you are getting for that price are not always commensurate. There are times you pay in excess of what you are receiving in value and times you pay far less.

This is one of those times.

I have no idea what the price of Dow’s stock will be in the future. I do know that, buying the stock at its current levels, yielding a growing 4.5% is a wise move long term. With earnings expectations above $3.50 for 2010 (the next expected trough), Dow currently sits at about 10 times those earnings. Should Liveris’s “well north” mean $3.90 a share or higher, then we have a 4.5% yielding company sitting at 8 to 9 times earnings…

All this does not take into account the endless possibilities of $9.5 billion coming into the bank this year….”

It would appear Warren agrees….

Now, much is being said today about the premium Dow is paying. Let’s look closer.
The deal is only a 47.9% premium to Rohm and Haas 60-day average price and a 28.7% premium to its 2008 closing high. Liveris did point out the the share price of Rohm dropped 16% during the month the deal came together. If it had just stayed flat, the “premium wretching” we have been hearing about would be nil. With Rohm & Haas, Dow is now committing to industry trough (2010-2011) EPS of $4 a share, up 14% from the previous $3.50 a share announced earlier this year. Let’s not forget the EPS for the trough is an “in the bag” estimate, expect superior results.

View Dow pdf. presentation on the deal:

View Dow Press Release

Disclosure (“none” means no position):Long Dow, none

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Berkshire’s (BRK.A) Warren Buffett finally sees the light!!!

Dow Chemical (DOW) said today that it has agreed to buy Rohm and Haas (ROH), the specialty chemical maker, for about $18.8 billion in cash with the help of Buffett.

Dow will pay $78 a share in cash, a 74 percent premium over Rohm and Haas’s closing price on Wednesday. Rohm and Haas will continue to do business under its own name, and it will maintain its headquarters in Philadelphia.

The new company will be the nation’s largest makers of specialty chemicals, and helps both companies gain scale at a time when commodities prices are still rising.

The deal is an all-cash one. In addition to debt financing from Citigroup (C), Merrill Lynch (MER) and Morgan Stanley (MS),Dow received an equity investment from Berkshire Hathaway and the Kuwait Investment Authority paid $3 billion and $1 billion respectively for convertible preferred securities.

“The acquisition of Rohm and Haas is a defining step in our transformational strategy to shape the ‘Dow of Tomorrow’ – a high value, diversified chemicals and materials company, creating the largest specialty chemicals company in the United States with a leading global position in performance products and advanced materials,” Andrew N. Liveris, Dow’s chairman and chief executive, said in a statement.

More on this later…

Disclosure (“none” means no position):long Dow,C, none

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