Buyout Buzz Boosts Dow Chemical

A news story that the chemicals giant could be the target of a $54 billion takeover sent the shares higher Monday

In the superheated M&A market, the targets appear to be getting bigger and bigger. Shares of Dow Chemical (DOW) soared on to a new 52-week high Feb. 26 after a report from The Express on Sunday the previous day said that buyout firms such as Kohlberg Kravis Roberts & Co., Blackstone Capital Partners LP and Carlyle Group are expected to snap up the chemicals giant for $54 billion and a lot of debt.

Dow's performance plastics, performance chemicals, agricultural sciences, basic plastics, basic chemicals and hydrocarbons and energy businesses could be separated into smaller pieces. The Express report said the leveraged-buyout deal is expected to take place in a few weeks and come in at $60 per share. Speculators believe Dow Chemical's break-up value is anywhere up to $80 per share, the U.K. newspaper reported, without naming sources.

Investors bid up the stock 5.1% to $45.69 per share in early afternoon trading on the New York Stock Exchange. Earlier Feb. 26, Dow's shares hit a high of the year at $47.26 per share.

Some experts doubted the U.K. news report.

"While our reaction is disbelief and we are not changing our hold opinion, we have long thought that Dow was the premier U.S. chemical company with a broad business mix," Standard & Poor's Corp. analyst Richard O'Reilly said in a Feb. 26 research note. (S&P, like, is owned by The McGraw-Hill Companies.) Citing factors like the company's strengthened balance sheet of recent years, O'Reilly raised a target price on the stock to $50 per share from $45 to reflect a possible buyout premium.

Market players had no official comment with which to ground themselves.

"As a policy we don't comment on rumors or speculation," said Dow spokesman Chris Huntley. Blackstone Capital Partners LP and Kekst and Company, which represents Kohlberg Kravis Roberts & Co., were not available for comment within press time. Carlyle Group declined comment.

Investors would be buying the Midland (Mich.) company after its shares have languished for the past two years, amid market worries about many of Dow's cyclical plastics and chemicals businesses. CEO Andrew Liveris has been trying win investor confidence by moving more of his company's business into products that generate larger and more stable profits.

"Barring a substantial portfolio overhaul, we see Dow's returns on invested capital remaining linked to the volatile commodity chemical cycle," Morningstar analyst Ben Johnson said in a research note Feb. 12.

Investors have mergers and acquisitions on the brain after numerous deals took place in recent months. Just on Feb. 26, for example, the Dallas energy company TXU Corp. (TXU) said it agreed to sell to KKR and Texas Pacific Group for $45 billion.

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