Kuwait Investment Authority (KIA) has again shown its tremendous financial power following its $1 billion (Dh3.67bn) investment in Dow Chemical's $18.8bn ($15.4bn in cash and approximately $3.4bn in debt) acquisition of Rohm and Haas.
The price was at a significant premium to the previous closing share price. The premium is often high in chemical company acquisitions. Warren Buffett's Berkshire Hathaway, like the KIA still in a powerful financial condition despite the problems in markets over the last year, has also ploughed in $3bn in the deal.
At the end of March 2008, Berkshire had $35bn in cash at its disposal.
The deal will be part funded by $8bn raised from last year's decision to put Dow's basic commodity business in a joint venture with a unit of Kuwait Petroleum, Kuwait Petrochemical Industries.
The petrochemicals joint venture was inspired to link the Middle East company's vast energy supply with Dow's market reach.
The joint venture manufactures and sells chemicals used in products from plastic bottles, compact disks and computers to agricultural compounds.
The Rohm and Haas takeover reflects the challenges faced by chemicals companies on the back of high and rising energy prices and falling demand for mainstream products.
Critical is the successful move to high margin products. Dow itself faces a margin squeeze as rising oil prices cut profits from sales of polyethylene and Styrofoam. Rohm and Haas generated 31 per cent of its 2007 profit from materials used to make electronics such as computer chips, which are higher margin products.
Costs for energy and materials such as natural gas and naphtha – used in making plastics and commodity chemicals – have surged fourfold in the past five years to an estimated $32bn this year, Dow stated. Dow had $53.5bn of sales last year.
The acquisition of Rohm and Haas is expected to start to boost Dow's profits significantly two years after it is completed. The merger will boost earnings by 5 per cent in 2010 and 13 per cent in 2011. The deal should be neutral to earnings in 2009.
Rohm and Haas, based in Philadelphia, is the world's largest producer of acrylic paint ingredients and also makes chemicals used in adhesives, packaging materials and personal-care products such as hair gel.
Rohm and Haas, the world's largest producer of pads for polishing silicon wafers, had planned to double sales of electronic materials to $3.5bn by 2010 as the company expands into flat-panel television parts. Dow said the unit that will include Rohm and Haas's business will have annual revenue of about $13bn.
The purchase will have pre-tax cost synergies of at least $800m per year from increased purchasing power for raw materials, supply chain improvements and the elimination of redundant corporate services and governance.
Dow will retain investment grade credit ratings after the transaction, with a total debt-to-capital ratio of less than 40 per cent. The deal is expected to close early in 2009.
On the back of global credit crisis and liquidity squeeze, the KIA has made some high profile investments this year, including stakes in Merrill Lynch and Citigroup.
The KIA's investments in financials and chemical companies is seen as a natural link given Kuwait's economic profile.