Dow’s Buyout Premium is Falling Fast (DOW)

Dow Chemical (DOW) is once again spiking on buyout news this morning, but the stock is falling back below previous highs set on March 26^th.  Today the British rumor mill is spitting out a $50 billion pending offer that the Sunday Express says would take Dow private at between $52 to $58 per share, and named a consortium including KKR as the bidding group. 

When another rumor surfaced (with price tag magically attached) from the same source on February 26^th, the mid-day price went as high as $47.26 before ending the day just below $45.  Today DOW shares traded briefly as high as $47.49 before falling to the mid-$46 level. 

The “club deal” or group of private equity investors slicing up the take would be of an unprecedented size on this one; this could finally bring the debate over club deal legality into the open.  And the rumored division between Middle Eastern and U.S. sources could create some massive regulatory concerns.  And again, that’s if the story has any basis to it – we’ve heard this cry of “wolf” before.

CNBC’s David Faber doesn’t think the rumor has a lot of merit, and his cited reasons include two very obvious ones: 

#1 – the source is a British tabloid…enough said

#2 – Dow has come out and said publicly that they’re not interested in going private or being split up

I’ll call attention to an important #3, which we highlighted a few weeks ago.  The numerous joint ventures Dow has going on seem to create a web that is thick enough to drive away all but the most serious of private equity bidders. 

Is there still potential upside to DOW shares from here?  Sure, if the break-up values proposed by us and others are accurate, prices below $50/share could be attractive.  But Dow is still a commodity-based business, and how much of a bidding war can we expect on a company already worth $12 billion more than the largest private equity deal in history? (TXU’s pending $30 billion buyout)

Stay tuned, as either rumors will continue to swirl or Dow will make a statement that removes most of the doubt surrounding their motives.  In the meantime, DOW shares trade at the top of their 52-week range of $33 – $47.26.

Ryan Barnes

April 9, 2007

Ryan Barnes can be reached at [email protected]; he does not own securities in the companies he covers.