Dow Chemical said on Thursday it would buy rival Rohm and Haas for $15.3 billion in a move to broaden its product offerings in higher margin markets such as paints, coatings and electronic materials.
With the purchase, Dow Chief Executive Officer Andrew Liveris has taken a major step toward his long-stated goal of moving the Midland, Michigan-based company into the higher-margin specialty chemicals business.
"The transaction delivers on the promises we have made to our shareholders about transforming our earnings profile to one of high-growth and less cyclicality," Liveris told a conference call.
The all-cash deal for $78 per share is a 74 percent premium compared to Rohm and Haas' closing price of $44.83 per share on Wednesday on the New York Stock Exchange.
Including Rohm & Haas' debt of $3.5 billion, the deal would be valued at $18.8 billion.
When asked about the premium, Liveris told CNBC: "It was worth the price."
Financing for the acquisition includes an equity investment by billionaire Warren Buffett's Berkshire Hathaway and the Kuwait Investment Authority in the form of convertible preferred securities for $3 billion and $1 billion, respectively.
Dow has long been among the largest global makers of commodity chemicals such as those used to make plastics, but that business is typically cyclical and yields thinner margins.
With this one acquisition, Dow boosts its presence across a wide range of specialty markets and positions itself to withstand industry downturns.
"The addition of Rohm and Haas' portfolio is game-changing for Dow," Chairman and Chief Executive Andrew Liveris said in a statement, referring to its new acquisition as a "beachfront" premier property.
"We've said for a while that we're going to be disciplined, we're going to wait for the right property, the right asset, and frankly, a month ago, this deal was not available. A month later, we have this wonderful announcement. We're very, very thrilled," Liveris told CNBC.
Dow has also secured $13 billion debt financing from Citigroup, Merrill Lynch and Morgan Stanley.
It hopes to pay down some of this debt immediately after receiving the proceeds from its planned joint venture with Kuwait Petroleum.
In December 2007, Dow announced it would receive $9.5 billion from Kuwait Petroleum to form a 50-50 plastics joint venture.
The deal may weigh on Dow over the near term, according to BB&T Capital Markets analyst Frank Mitsch, but the expected annual cost savings of $800 million that Dow should prove to be a benefit.
"Although we expect to see modest dilution in the near term (about 5 percent), we can readily see that in the long term after various synergies are realized (up to 20 percent accretion), this transaction will likely be positive," Mitsch wrote in a note to investors.
Dow, one of the largest energy consumers in the United States, has hiked its prices twice since early May and instituted freight surcharges to help pass along the sharp jump in energy prices.
Liveris told Reuters that Dow received an early indication from credit rating agency Moody's that its debt would remain investment grade, and that its debt-to-capitalization ratio would be below 40 percent.
He expects the combined company to earn more than $4 a share by the time the industry faces its next market trough, which analysts expect to take place in about 2010.
For Berkshire, which will become Dow's largest shareholder, the deal is similar to the role it played in helping candy maker Mars to buy chewing gum company Wrigley Jr for $23 billion.
Dow said the deal would be "meaningfully accretive" to earnings in the second year after it closes, and Liveris said Dow has been "appropriately conservative" on the level of earnings that it hopes to generate from the deal.
Dow will create an advanced materials business unit at Rohm and Haas' current headquarters in Philadelphia that will have a total annual revenue of nearly $13 billion, upon completion.
Two Rohm and Haas directors will join the Dow's board, bringing the total size of Dow's board to 14.
Shares in Rohm & Haas jumped 65 percent to $74.04, while Dow shares slipped 3 percent to $33 on the New York Stock Exchange.