Debt-Laden Dow Chemical Buys and Sells

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The union of Dow Chemical (NYSE: DOW) and Rohm and Haas isn't all peaches and cream, with Dow facing an uphill struggle to pay off debt from the deal and stabilize its finances.

The transaction was entirely funded through short-term debt and preferred stock, not exactly sources that Mr. Market is rewarding in this cash-strapped environment. After completing the deal, Dow must pay down a debt-laden balance sheet that's already presenting the company with headaches. Last Wednesday the company's stock was downgraded by Standard & Poor's from "BBB" to "BBB-". That puts it one step above junk.

As a means of trimming the debt load, Dow is already holding asset garage sales. It immediately unloaded Rohm's Morton Salt unit for $1.68 billion to Germany's K+S AG. "This sale puts us ahead of schedule on our de-leveraging plan post the close of the Rohm and Haas acquisition," said Dow CEO Andrew Liveris. I wouldn't be surprised by additional asset sales in the weeks and months ahead.

The Rohm and Haas transaction won't be remembered as one of the smoother events in Dow's 112-year history. The purchase price was supposed to come from a joint venture Dow had entered into with a Kuwaiti company that would yield it $9 billion. But when the Kuwaitis pulled the plug on the venture, Dow was suddenly forced to search for funding elsewhere. After legal action and consternation on both parts, Dow was able to tap its bank lines and gain contributions from major Rohm shareholders, and so the deal was done.

But Dow's future remains somewhat in doubt. Chemical companies are dicey right now, with the pullbacks in automobile manufacturing and construction clobbering demand for their products. DuPont (NYSE: DD) underwent a round of layoffs in December, although it has managed to retain its "A" credit rating. Rohm's Philadelphia neighbor, FMC Corp. (NYSE: FMC) and smaller competitor Ferro Corp. (NYSE: FOE) have both been treated shabbily by Mr. Market.

I've been fascinated by Dow's pique for months now. And while I think we still have some rough sledding ahead of us in the market, I'll be surprised if in a year from now Dow isn't trading for well above the $11 at which it closed on Friday.

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