Dow says Rohm premium was “irrelevant”

Dow Chemical Co’s Chief Executive Andrew Liveris said deal premiums are funny things to write about, so we at DealZone had to take him up on it.

Dow agreed to buy Rohm and Haas for $15.3 billion, marking a 74 percent premium over Rohm and Haas’s closing stock price on Wednesday and a 24 premium over its all-time high set last year. Rohm and Haas’s stock surged 64 percent to close on Thursday at $73.62.

Deal premiums — the difference between the takeover price and the seller’s stock price the day before news of the deal hits — historically hover at around 20-25 percent in the United States, according to Dealogic.

Dow’s purchase of Rohm and Haas exceeds premiums on several valuation metrics. The all-cash deal values Rohm and Haas at 10.4 times EBITDA (earnings before interest, taxes, depreciation and amortization), well above the 6.7 multiple at which the chemical sector trades, Jefferies & Co analysts said.

Dow executives staunchly defended the price paid for Rohm and Haas, which they had been previously unavailable to buy since the Haas Family Group controlled a roughly 30-percent stake. The family recently decided to diversify its holdings, putting Rohm and Haas up for grabs.

“As you know, we have been carefully evaluating the marketplace for years and we believe that Rohm and Haas is our ideal match,” Liveris said. “There aren’t many jewels out there, this is one of them. The fact that it became available matched Dow’s strategy perfectly.”

As one analyst asked the company on a conference call: “Such a large premium — is that a reflection of the 30 percent Haas family stake? Or is that because Raj (Gupta, Rohm and Haas Chairman) is a good negotiator?”

Liveris defended the premium by saying “a one-day premium is a fascinating topic, which I hope in a week or two will be irrelevant because Rohm and Haas’ stock has dropped 16 percent during negotiations.”

“I think lots of funny things might be written about premiums. That doesn’t reflect the value of the combined enterprise….the one-day premium is a fascinating topic, but frankly it’s not the reason the deal happens or doesn’t happen,” Liveris said.

Forget book value or earnings growth potential. Often, people may overlook the touchy-feely aspects of a deal:

“While it’s hard to put a price on a company’s culture and people, this premium recognizes the fact that Rohm and Haas is a highly-coveted asset in terms of both of these critical attributes, as well as the quality and reputation of its businesses, brands, products, and technologies. As many of you are aware, until very recently this company was unavailable,” Dow’s Chief Financial Officer Geoffery Merszei said.

The premium may be high, but it’s not one for the record books. Among all U.S. deals above $5 billion, Rohm and Haas ranks as only the 26th largest premium ever, according to Thomson Reuters data.

The record premium paid? 204 percent. That was paid by RJ Reynolds Tobacco Holdings’ purchase of Nabisco Group Holdings in 2000, according to Thomson Reuters data.