Dow Chemical and Kuwait's Petrochemical Industries Finalize Joint Venture at $2 Billion Lower Value

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Researched by Industrial Info Resources (Sugar Land, Texas)--A joint-venture agreement between Kuwait's state-owned Petrochemicals Industries Company (PIC) (Safat) and Dow Chemical (NYSE:DOW) (Midland, Michigan) has been finalized, albeit at a lower value. Both companies will have a 50% stake in the new joint venture company, K-Dow Petrochemicals. K-Dow will be headquartered in the U.S. and begin operation in January 2009. The announcement of the joint venture was made last year with Dow Chemical contributing a part of its existing assets to the joint venture. PIC agreed to pay 50% of the total asset value to Dow. The value of assets was $19 billion. There have been reports in the past month that considering the present economic crisis, the government had directed Kuwait Petroleum Corporation (Safat) to review the terms of the joint-venture agreement. The deal was then renegotiated, and the Kuwaiti government approved the revised deal last week. The total revised enterprise value of K-Dow will be $17.4 billion, an 8.5% reduction over the original value of $19 billion. Each company will have shares worth $8.72 billion. Dow is expected to receive a gross of $9 billion, which includes a $7.5 billion payment by PIC and the special cash contribution of $1.5 billion that K-Dow will pay to both PIC and Dow.

As part of the new agreement, two existing joint ventures between Dow and PIC will also be part of K-Dow. They are MEGlobal (Dubai, United Arab Emirates), which manufactures monoethylene glycol, and Equipolymers (Horgen, Switzerland), which supplies polyethylene terephthalate (PET) resins. The inclusion of these two companies in K-Dow is expected to increase the annual revenue of the company from $11 billion, as projected earlier, to $15 billion.

K-Dow will manufacture and distribute ethnolamines, polypropylene, ethyleneamines, polyethylene, polycarobonates and various catalyst and licensing technologies worldwide. These products will be used extensively to manufacture milk containers, automotive products, fibers, consumer products, films and food packaging. The company will have 15 manufacturing facilities across Europe, Latin America and North America, employing about 5,000 people.

The joint venture with PIC has been strategically crucial for Dow. There were reports of the joint venture falling through, which would have adversely affected Dow's future plans. This joint venture is expected to give Dow privileged access to raw material and feedstock in Kuwait for future projects. The company had announced the $15.3 billion acquisition of Rohm and Haas (NYSE:ROH) (Philadelphia, Pennsylvania), a leading specialty chemicals manufacturer, indicating that it would use a part of the proceeds from its assets sell-off to PIC for this buyout. The acquisition is now expected to be complete by next year. Dow also plans to shift focus from low-margin generic chemicals, which require a continuous supply of natural gas and oil, to the manufacture of high-profit specialty chemicals. The asset sale to PIC was critical for this venture.

Globally, the chemical and petrochemical sector is facing a slump in demand. This has been attributed to the spiraling crude oil prices and, more recently, to the economic meltdown. With developed economies facing recession and emerging economies witnessing a slowdown, this industry is in troubled waters. Dow, being one of the largest chemical manufacturers in the U.S., has also experienced a sharp fall in its share prices and reduced global demand. Dow announced that it planned to reduce its capital expenditure from $100 million to $2.1 million during the current fiscal year in the wake of the economic slowdown. The company also predicted the demand would fall by 10%-20% in the next few quarters. Dow has a turnover of $54 billion worldwide, employing 46,000 people with customers in 160 countries.

Interestingly, there have been fresh investments in the oil sector. State-owned Kuwait Gulf Oil Company (Ahmadi) recently announced that it will invest $3.6 billion to boost oil production. The investment will be made between 2008 and 2012. This investment was part of the 2020 plan that was formulated earlier to increase production capacity in the neutral zone. The neutral zone is common to both Kuwait and Saudi Arabia with both countries sharing the oil output of 550,000 barrels per day. Sources indicated that important oil projects may not be affected by the present economic meltdown but the agreements will be reviewed and renegotiated to arrive at the best price.

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