Dec. 13 (Bloomberg) -- Kuwait agreed to buy 50 percent of Dow Chemical Co.'s commodity-plastics unit for $9.5 billion, the biggest overseas investment by a Kuwaiti company.

Dow, the largest U.S. chemical maker, rose the most in five years in New York trading after announcing it will form a joint venture with Safat, Kuwait-based Petrochemical Industries Co. Dow generated 22 percent of sales last year from the unit, Midland, Michigan-based Dow said today in a statement.

Persian Gulf states, flush with oil revenue, have doubled their overseas investments to a record $74.5 billion this year, including today's deal, Bloomberg data show. Dow Chief Executive Officer Andrew Liveris said the venture will provide the world's largest plastics business with cheaper raw materials. Dow plans to use the cash to buy specialty-chemical assets.

``It's a decent deal,'' Steve Hoedt, an analyst who helps manage $34 billion in private investments at National City Corp., including 2.4 million Dow Chemical shares, said today in a phone interview. ``North American companies don't have access to the low-cost feedstocks that companies in the Middle East do, so it makes a lot of sense for Dow to do transactions like this.''

The venture will be based in the U.S., employ 5,000 and include all Dow's plants that make polyethylene, polypropylene and polycarbonate plastics, as well as intermediate chemicals known as amines, the company said.

Shares Climb

Dow Chemical rose $2.64, or 6.3 percent, to $44.39 at 4:19 p.m. in New York Stock Exchange composite trading. It was the biggest percentage increase since October 2002. Dow has gained 11 percent this year.

``This is a landmark deal,'' Liveris said in a phone interview. ``Apart from the cash, the half we still own will be enormously benefited by Kuwait Petroleum's oil and gas position in future projects, not just the ones in Kuwait, but elsewhere, like in China.''

Petrochemical Industries will provide the venture with raw materials through its owner, Kuwait Petroleum Corp., which is building refineries in emerging regions, the companies said. The refineries may provide half of the venture's raw materials in 10 to 15 years, Liveris said. Dow's costs for energy and ingredients surged to $22 billion last year from $8 billion three years earlier.

The venture will provide Kuwaitis with jobs and training while making better use of the country's oil and gas reserves, Saad Al-Shuwaib, chief executive officer of Kuwait Petroleum, said on a conference call with Dow investors.

`Vehicle for Growth'

``This will be an excellent vehicle for growth,'' Al-Shuwaib said on the call. ``Today is a tremendous day for Kuwait.''

In addition to global plastics and amines assets, Dow will contribute ethylene plants in Fort Saskatchewan, Canada; Bahia, Argentina; and Tarragona, Spain.

Sales and profit in the venture will grow 6 percent to 8 percent a year, Liveris said in an interview. Dow doesn't expect to form any more large joint ventures with Middle East partners, he said.

Sales from specialty products, such as insulation and water- treatment filters, will rise to two-thirds of Dow's total from half after the transaction closes late next year, Liveris said in the interview. Dow may spend more than $15 billion to acquire a large producer of specialty chemicals that serve a number of fast-growing markets, Liveris said.

``There is another shoe to drop. You can count on it,'' Liveris said on the investor call. ``We are not averse to any deals, no matter what the size.''

`Hunting'

Chief Financial Officer Geoffery Merszei said Dow doesn't need to delay acquisitions until the venture starts, because the company has plenty of room to increase borrowings. Liveris said he is ``hunting'' for acquisitions in so-called market-facing businesses, such as food and nutrition, energy efficiency, alternative energy, water treatment, construction, transportation and electronics.

``We have pored over lots of opportunities and we think there are deals out there,'' Liveris said. ``We will replace at least half the earnings from this business with earnings streams that are better, more stable.''

Liveris is taking the right steps to reduce profit swings, said Hassan Ahmed, a New York-based analyst at HSBC Securities. As a result, investors may begin to boost the value of Dow's stock to 16 times next year's earnings, from 11.5 times, he said. Dow will have $10 billion in cash to spend on acquisitions when the Kuwait transaction is completed, he said.

`Step One'

``This is step one of a two-step process,'' Ahmed said in a phone interview. ``A specialty acquisition becomes highly likely.'' He recommends buying the shares with a $55 price target.

At $9.5 billion, the Dow agreement is the second-biggest acquisition by a Gulf investor after Saudi Basic Industries Corp.'s $11.6 billion purchase of General Electric Co.'s plastics unit this year.

``We will see more deals like this and there are a lot of talks going on in Qatar, Oman and elsewhere,'' Abdullah bin Zaid al-Hagbani, secretary-general of the Gulf Petrochemicals and Chemicals Association, said in reference to the joint venture.

Dow has announced ventures this year in Saudi Arabia, China, Libya and Brazil, adding to its alliances in Kuwait and Malaysia, to cut project costs, access cheaper raw materials and serve faster-growing markets.

Market Value

Kuwait has valued one-quarter of Dow's business at half the company's market value, demonstrating that the market undervalues Dow, Liveris said. The company had a market value of $41.9 billion at the close of regular trading in New York. In January, the CEO promised to transform Dow to reduce wide swings in profit when prices for commodity chemicals, such as ethylene, reach a cyclical trough.

Dow first partnered with Kuwait in their Equate plastics joint venture a decade ago, Liveris said. Dow now will have four ventures with Kuwait, generating $14 billion in annual sales at 14 manufacturing sites, Liveris said.

The U.S. chemical maker postponed an investor meeting in October, fueling speculation that the company was working on a major transaction. Liveris said the company now plans to have the meeting by June.

Dow is the world's largest producer of polyethylene, used in milk jugs, pipe and plastic bags, and the largest maker of amines, which are used in wood treatments, drug processing, paints and consumer products. Polypropylene is used in synthetic fibers, packaging and car parts, while polycarbonate is a hard plastic used in CDs, among other applications.

Specialty Plastics

Dow retains the business that makes specialty plastics, which are engineered for products such as car parts and home insulation. Specialties tend to have more stable profitability than commodity plastics, used in such things as shopping bags, whose profits are tied to global supply-and-demand trends.

Liveris repeated his January pledge to change Dow's business mix so earnings won't drop to less than $2 to $3 a share when chemical prices fall, perhaps by 2010. Profit excluding certain items tumbled as low as 34 cents a share in 2002, when chemical and plastic demand slumped.

``We believe we are closer to the $3 mark,'' Liveris said in the call from New York.

The venture may have a debt-to-capital ratio of 30 to 40 percent, Merszei said. It probably will issue its own bonds and use the proceeds to pay a dividend to Dow, he said.

Law firms Shearman & Sterling LLP and Cleary Gottlieb Steen & Hamilton LLP advised Dow on the Kuwait transaction.

To contact the reporter on this story: Jack Kaskey in New York at jkaskey@bloomberg.net.

Last Updated: December 13, 2007 16:27 EST