Dow Sells Morton, Pays Down Debt

Dow Chemical Company (DOW - Analyst Report) has recently paid off its entire outstanding balance of $1 billion for a bridge loan raised to fund its Rohm & Haas acquisition this year. The company used a large portion of the proceeds from its sale of Morton Salt -- the salt business of Rohm & Haas -- to K+S Aktiengesellschaft of Kassel, Germany, for $1.675 billion. K+G AG is an agricultural chemical and salt company and the largest supplier of potash in Europe. The Morton Salt Co. includes major operations in Hutchinson.

Dow plans to use the remaining proceeds from the Morton Salt sale as well as proceeds from future divestiture agreements to pay down other debt, in line with the company's broader de-leveraging plan.

Dow's debt had become a concern to the company. The Rohm and Haas acquisition had increased net debt from $8 billion to $22 billion in the first half of 2009. This resulted in a significant net cash deficit of $19 billion during the period. However, Dow Chemical has become the world’s leading specialty chemicals and advanced materials company after acquiring Rohm and Haas for a total investment of $16.5 billion.

Earlier in August this year, Dow Chemical had made a $2.75 billion public debt offering in an effort to repay a loan used to acquire Rohm & Haas. The proceeds will be used to repay a bridge loan used for the $16.5 billion acquisition by the year-end.

In April, Dow acquired all outstanding shares of Rohm & Haas at $78 each, funding the deal by issuing $7 billion in preferred stock and borrowing $9.23 billion in a short-term loan. To help finance the transaction, Dow has also renegotiated a $12.5 billion bridge loan syndicated by 19 banks led by Citigroup (C - Analyst Report), Merrill Lynch and Morgan Stanley (MS - Analyst Report). This new loan agreement adds two years to the repayment and has slightly looser debt covenants (the loan's required leverage ratio has been lifted to 5.75 from 4.25), helping to further protect Dow from default.

Dow aimed to repay the bridge loan through sale of assets, issuance of equity and debt and by slashing dividend by 64% to preserve cash. Asset sales included the company’s thermoplastic polyurethane business, Morton International and the spin-off or sale of the Dow AgroSciences division, as well as some specialty businesses such as powder coatings and synthetic rubber. However, Dow has retained its Agro business, anticipating robust growth in the near term.

We recommend shares of Dow as Neutral.

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