Does 20% haircut make Dow Chemical attractive?

Posted Dec 30th 2008 6:00PM by Jamie Dlugosch
Filed under: Deals, Bad News, Newsletters, Dow Chemical (DOW), Stocks to Buy

I recently put together a report of stocks to avoid in 2009. In compiling the list, I used general themes that I thought would struggle during the coming year. At the top of the list were chemical companies.

Though not on the list of specific stocks to avoid, I certainly did consider calling out Dow Chemical (NYSE: DOW) as a stock to avoid in the coming year. That would have been insightful, as shares of DOW lost nearly 20% of their value due to the termination of a joint venture project in Kuwait

The proposed K-Dow Petrochemicals was formed to help Dow reduce exposure to the highly cyclical petrochemical plastics business. More importantly, the $17.4 billion venture was slated to provide Dow some much needed cash, including $7 billion up front.

That cash was going to be needed in Dow's yet-to-be-closed acquisition of Rohm and Haas Company (NYSE: ROH). That deal is currently valued at just over $15 billion and would have been much easier to swallow with the K-Dow deal intact.

Now, legitimate questions are being raised as to whether the Rohm and Haas deal will close. Dow is claiming, and had previously claimed, that it did not need the Kuwait deal to fund the acquisition.

Then again, I highly doubt the company was anticipating a global meltdown and credit crisis of epic proportion.

In response to the collapse of the Kuwait deal, investors sold shares of Dow first and will ask questions later. The situation is clearly a train wreck, and investors are rightly concerned.

Was the selling justified?

It's hard to say. One solution, of course, is to lower the purchase price of Rohm and Haas. That solution seems unlikely, though. Rohm and Haas has all the leverage. Why should it lower the price?

If the deal collapses, it receives a break-up fee and remains an independent company. It can't hurt to ask for a lower price, but a deal is a deal. I see Dow stuck with this one.

But, are they really stuck?

Granted the timing for the deal was poor. Waiting but a few months would have most certainly resulted in a lower acquisition price. Then again, Rohm and Haas had been trading lower, struggling with its valuation.

In the long run, closing the deal makes sense for Dow. Assuming financing doesn't kill the company, the benefits outweigh the risk.

Dow still faces the macroeconomic challenges that put the chemical sector on my stocks to avoid list. That said, the 20% haircut following the news eliminates much of the downside. In fact, I would be tempted to buy shares at these levels.

Of course, none of these issues will resolve in the immediate term. If you want to buy Dow, I suspect you need not be in any hurry.

Jamie Dlugosch is a contributor to InvestorPlace.com.

Tags: chemical stocks, chemicals, ChemicalStocks, dlugosch, featured, kuwait, roh, Rohm and Haas, RohmAndHaas