New York, Jan 27 - Dow Chemical Co refused to close its $15.3 billion takeover of rival Rohm and Haas Co by Tuesday, breaking a key condition of the merger and sparking speculation that the deal might collapse.
Rohm and Haas sued Dow on Monday, arguing that the chemical company has no legal basis to walk away from the deal and asking a Delaware court to order it to complete the transaction. Rohm and Haas shares fell 13 percent in afternoon trading.
Dow said it remains interested in discussions to find a way to complete the deal but that the recent economic downturn has made closing untenable at this time.
"Dow Chemical has a long history of resiliency in responding to changing market conditions, and that resiliency continues, but the world has changed significantly and we still do not see the bottom of this unprecedented demand destruction," Dow Chief Executive Andrew Liveris said in a statement.
Dow's planned takeover of Rohm and Haas, a specialty chemicals company, has been clouded with uncertainty since Kuwait scrapped plans for a $17.4 billion joint venture with Dow in December. Dow intended to use proceeds from that venture to help fund the Rohm and Haas buy.
Last summer Dow agreed to buy Rohm and Haas for $78 a share -- a 74 percent premium -- to broaden product offerings in higher-margin markets such as paints, coatings and electronic materials.
But chemicals companies have been hurt by the weakening economy as demand from industries they supply, such as autos, housing and electronics, has fallen drastically. They have also seen a slowdown in many emerging regions -- areas that had been driving growth for chemicals in recent quarters.
Dow and Rohm and Haas have both announced job cuts and other cost-cutting measures since their deal was announced.
Nevertheless, if the merger is not completed on a timely basis, Dow faces a "ticking fee" that requires it to pay Rohm and Haas about $100 million for every month it does not close the transaction.
VERY TIGHT AGREEMENT
Lawyers have said the merger agreement is very tight and Dow, the largest U.S. chemical maker, has limited wiggle room if it seeks to back out.
"They've got no basis for terminating this. They are not even arguing they have a basis for terminating it," said Joel Greenberg, co-chair of law firm Kaye Scholer LLP's corporate and finance department.
Greenberg said that if Rohm and Haas fails to compel Dow to close the deal, Dow could still be liable for damages for the difference between the deal price and Rohm and Haas' actual stock price.
Under the merger agreement, the companies were to close the merger within two business days following final regulatory approval, which came on Friday.
But in its lawsuit, Rohm said that Dow has refused to commit to closing at all. It said that Liveris told Rohm that Dow believed it would be able to determine whether it could close the merger by June 30.
Last year, Huntsman Corp sued Apollo Management's Hexion Specialty Chemicals unit when it tried to cancel its $6.5 billion agreement to buy Huntsman. A Delaware court found in favor of Huntsman, but the parties later agreed to terminate the deal in exchange for a $1 billion settlement.
Gene Pisasale, senior energy analyst at PNC Capital Advisors, which owns Dow shares, said he believes Dow is trying both to renegotiate its takeover of Rohm and find a partner for the collapsed Kuwaiti joint venture to help finance the deal.
"I think Andrew Liveris at Dow is going to pull out all the stops to try and save both deals if possible," Pisasale said.
Shares of Rohm and Haas tumbled $8.37 or 12.7 percent to $57.45 on the New York Stock Exchange, while Dow shares fell 5.6 percent to $13.53.