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Tue 10 Apr 2007 09:55 AM

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Analysts doubt US-Gulf bid for Dow

But Dow Chemical shares jump 4.5% following a report suggesting a $50bn bid for the company.

Dow Chemical Co. shares jumped 4.5% on Monday following a British tabloid report that a consortium was preparing

a $50 billion bid

for the company.

Analysts have expressed scepticism about a possible buyout, saying a strategic joint venture is more feasible.

J.P. Morgan analyst Jeffrey Zekauskas said in a research note late last month, "We believe there is a low probability that a buyout will take place, but a reasonable probability that Dow can conclude a strategic joint venture for its Basic petrochemical assets, and perhaps other units as well."

The Sunday Express, a UK tabloid, said an approach valuing Dow at $50 billion or more could come by the end of the week.

The report, which quoted sources close to the deal, said at least half of the capital is being provided by investors from Saudi Arabia, Kuwait, Bahrain, Qatar, UAE and Oman, with the rest contributed by a number of U.S. buyout firms, including Kohlberg Kravis Roberts.

Dow said it would not comment on market rumours and speculation.

But a Dow spokesman, Chris Huntley, said, "We harness tremendous power from integration, we are not going to move away from that strategy ... so a friendly takeover is not going to happen."

He said most analysts agree that a hostile takeover is unlikely as Dow is too large and too integrated to allow such a bid to be successful.

The Midland, Michigan-based company has been the subject of much speculation over the last few months. Besides being a suspected buyout target, it has been linked to joint ventures and other deals.

In late February, the Sunday Express, without naming any sources, reported that Dow might be the target of a leveraged buyout worth $54 billion.

"We do not expect some kind of LBO or private equity buyout of Dow, it may do a deal in commodities, but we do not believe that selling the entire company or splitting off specialties from commodities is likely," Citigroup analyst P.J. Juvekar said in a research note late last month.

A VALUATION STORY

Dow shares have spiked about 13% since mid-January, when the company was first reported to be a possible buyout target.

However, despite the rise, the shares trade at only 11.8 times projected 2007 earnings, compared with an average multiple of 18.2 for the components of the Standard and Poor's Chemical Index.

Hassan Ahmed, an analyst with HSBC, said Dow has about $3 billion in cash and, based on conservative estimates, is in a position to generate about $14 billion in distributable cash over the next five years. This makes the company attractive to private equity players, he said.

"Whether the deal takes this form or some other form, to a private equity player Dow is undervalued," Ahmed said.

Dow shares were up $2.01 to $46.48 in midday trade on the New York Stock Exchange.

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