“K-Dow”: Scandal or Strategic Investment? December 29, 2008
Posted by Abdul in Regulation, analysis, kuwait.Tags: Dow Chemical, K-Dow, KPC, kuwait
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Named K-Dow, this joint venture (JV) represents one of the most talked about deals in the country. Petrochemical Industries Company (PIC), a wholly owned subsidiary of Kuwait Petroleum Corporation (KPC), announced a multi-billion dollar joint venture with the Dow Chemical Company (Dow) in December 2007, in which Dow would contribute its Oil and Gas arm totally into the deal, creating the largest Polyethylene provider in the world. Polyethylene is the main ingredient in plastics. K-Dow would be larger than the JV between GE Plastic and SABEC and Chevron Phillips.
Oil and Gas represents nearly 25-30% of Dow’s operations. In December 2007, the JV was valued at $19 billion. With the markets plunging since the deal was announced, the JV was revalued to $15 billion in late November 2008, in which Kuwait would provide $6 billion for a 50% stake in the JV. The worst-case scenario for this deal would provide a return of at least 10% annually, as announced by PIC Chairman Maha Mulla Hussain. The venture would employ more than 5000 people (Kuwaitis and non-Kuwaitis) and have annual revenue of about $15 billion. Agreements were signed on November 28th after approval from Kuwait’s Supreme Petroleum Council, the highest authority in the Ministry of Oil.
So where’s the problem? Sounds like a great deal for Kuwait and Dow.
The problem surrounds Dow’s stock price and its valuation for this JV. In December 2007, Dow’s market capitalization (market cap) was $42 billion. Valuing the deal at $19 billion initially assumes that Dow’s value is much more than the market is showing. Andrew Liveris, Dow President, Chairman, and CEO, stated that both KPC and Dow thought the stock was undervalued at that time. He also stated that should KPC buy $9.5 billion worth of stock from the market the stock price would ultimately exceed the price it should be valued at. Makes sense, but this would make KPC exposed to other parts of Dow that are out of KPC’s core business.
The valuation was based on a 30-year life span, and was conducted by Price Waterhouse and Coopers and Morgan Stanley, two of the most well known accounting and investment companies in the world.
With markets in turmoil, the deal was revalued at KPC’s request to $12.5 billion, decreasing Kuwait’s payment from $9.5 to $7.5 billion for the same 50% stake. The venture would pay both parties $1.5 billion, reducing PIC’s net cost to $6 billion. At this price it would be a much better deal compared to previous comparable JVs in the petrochemical world, the latest of which was GE Plastic and SABEC deal. Dow’s market cap as of December 28th was $17.8 billion.
Dow’s relationship with Kuwait goes back over 10 years. EQUATE, a polyethylene plant in Kuwait is a partnership with Dow and has operated successfully throughout the years. EQUATE 2 is being constructed in Kuwait to expand its operations.
As of December 28th 2008, the Kuwaiti government cancelled the deal following weeks of opposition from parliament. Lawmakers stated that the deal was overpriced and that the deal shouldn’t be undertaken during these troubled times.
Reasons for creating this JV:
Kuwait: KPC’s long-term plan involves diversifying within the oil and gas sector and not relying solely on oil. Diversifying into petrochemicals makes sense within the major plan. Geographic diversification also fits into the plan, as K-Dow was supposed to build and operate several plants in the US. Learning from Dow and gaining synergies was also another major reason.
Dow: Dow’s major reason was to reduce reliance on commodity products and gain access to lower-cost petroleum, which is essential in making chemicals needed. Also, the funding K-Dow would have produced would have helped Dow in the $15.3 billion acquisition of Rohm and Haas Company, a specialty-chemical company producing chemicals used in paints and electronics. Kuwait Investment Authority (KIA) is included in the Rohm and Haas deal as well with a $1 billion investment.
What’s Next?
Several top-level employees (Chairmen and CEOs) of KPC and its subsidiaries are said to be preparing their resignations after the deal was cancelled due to pressure from lawmakers. This deal took more than 2 years to structure, and fell apart in less than 3 weeks.
Dow are still looking for partners in the Middle East (Saudi Arabia and UAE) as part of their initiative.
White House representatives have contacted Kuwaiti Officials at the Embassy in DC and mentioned that should the deal fall apart, Kuwait’s economic credibility would be in question.
Definitely a strategic investment. I was reading the news today in Bloomberg and I was shocked by the news. What’s even more shocking is the cancellation fee for breaking the deal is $2.5 BN (Bloomberg) which is almost 28% of the deal its self.
Sometimes I want to go the parliament and just choke some of the MP’s !!
As you said the people and experts in this deal have been working on it for 2 years. The funny thing is Ahmad Baqer was one of two ministers totally against the deal an he has a degree in pharmcy and no experience in the oil sector.
I saw the interview with the oil ministry in Alrai tv, the minister tried to explain the benifits of this deal and how it was going to create job opportunities and to own new techonolgy and to be a part of something big and useful beside exploring oil and refining it only and to be honest he did a good job. But the the interviewr kept interrupting the minister’s speech and asks unrelavent questions like are you going to remain as a minister in the next goverment?. then interview became a political interview instead of explaining the JV details because of these silly questions.
lets the watan newspaper geniuses listen to that!!
The problem in this deal is that it was done in the shadow! Why you think that the high petroleum consul would cover the details of the deal. Do they think that they are above the law? for me I love Kuwait to be a part of big company like Dow ,but not to loss money like they did in BP .this deal should be brought to the parliament sooner than that .
Khaled: The cancellation penalty has several clauses and to be honest the details are clear. It says the penalty is up to $2.5 billion. And, if you want to believe Al Watan TV, they mentioned in a news report that “if any government in the deal (Kuwait or US) decides to pull out, no fees would be incurred”. Again, thats from Al Watan TV.
Bader: Its all politics. Some loud MPs managed to pull the plug on this deal, and Al Rai TV were playing on that note instead of actually going into the details.
Dr. Dhari: Let’s hope people aren’t listening to only Al Watan.
Al Obaid: I agree with you that the details were not completely known in this deal. Then again, we don’t know anything that goes on in the country, so why is this different? Regarding the High Petroleum Council, yes they can do what they want. The council consists of 5 Ministers (the PM, Ministers of Oil, Finance, Commerce and Trade, and Vice PM) and 10 outside members that are appointed. Their decision is final, according to Kuwaiti Law. We all wish that we had details, but if we dont have all the details does that mean we cancel the deal? Or just ask for more time to study the issue more? Do we beckon to loud voices or listen to actual accountants, investment managers, and economists?
I don’t think the problem in K-Dow or any other major project, I think and believe the problem in us (Kuwaiti’s), we stopped carrying about the future of our country, future generation, we become so greedy, spoiled, uneducated, close-minded and stupid somehow.
we are driven by the bad news always wearing the fly eye.
Think about it, our grandfather worked so hard to make our future. Look at us, we are working so hard to destroyed our kids future.
until we use our brain, we will never move forward.
wow, I loved it
I only have one question. I understand Dow’s thrust for cash. Yet, why are they willing to give up 50% of their polyethylene business?
Waleed: You are correct.
Anon: Thanks
Ali: I think the “Reasons” section of the post explains it. They neeed cash for their Rohm and Haas deal, and they want easier access to raw materials (crude oil etc..). At times like these where will Dow raise the money needed for the Acquisition of Rohm and Haas?
i think this is the time where things need to be changed . you know every time i look to a mercedes car i say to my self that the guys who invested our money there are genius. but now unfortunately there is no one can think 2 weeks ahead ,i wonder if the people in k-dow project where able to think clearly regarding this deal ,Dow is struggling in the current time and even American investor are not willing to put money in it .but their other project “Rohm and Haas deal” .Microsoft google and warren buffet are competing on it. the big question is ,are they thinking of selling there shares in K-Dow after establishing their business with the advanced Rohm and Haas technology .
Abdul, maybe my question was vague. Between all Dow’s business line, why have they chosen to sell this one. Earlier this year, GE also moved into the same direction.
Don’t you think, the business itself not worth holding for the long run.
Is it economical feasable now to own such a business. Isn’t competetion killing the profit margin on it?
Al Obaid: I dont quite understand what you’re trying to say. Dow is not struggling currently. It needs cash for the takeover of R&H yes, and they released a statement saying they can get the money from other sources. So in terms of struggling then no.
Buffet is already in the R&H deal through Berkshire Hathaway. i think off the top of my head Berkshire has $3 Billion in that deal.
Abdul: You are right in terms of penalty agreements but as I read, that the council was the one who went back to revoke the deal, not the government, correct me if I am wrong.
In regards of this discussion, I believe that Dow was willing to give up 50% of its stake as this will be a strategic move that will realize more profits because of the strategic investors. Second of all, getting strategic investors into the deal that are backed up by liquid cash is much better than entering in loaning agreements that will have tremendous interest rate back fire, which in both short and long term, will backfire the Venture.
Abdul: As you asked in the title of this post if this was a Scandal or was it a Strategic Investment, I believe that it is very clear that there is nothing pointing out on any scandal. I think it is a very sound investment, both strategically, or in any form of investment you want to consider. Very soon, we will see that the rest of the GCC nations trying to fight for this deal since Kuwait has laid its hand off of it…
Having worked for many years at Dow I can assure you that it is a scanal how Dow packaged up its worst assets and tried to sell them to Kuwait at a valuation that now exceeds the total valuation of Dow Chemical. The parliamentarians have done well to spot the predatory nature of this deal and put an end to it.
Edward, Can you elaborate on your opinion?
Thanks
Edward, can you elaborate on your opinion?
Thanks