In late 2007, I lauded the announced JV between Kuwait Petroleum and Dow Chemicals (dubbed “K-Dow”) in a letter to the Financial Times. I cited the planned venture as an example of a sound partnership “enabling Dow and KPC to build a stronger business than either could do on its own.” A year later, Kuwait pulled out of the transaction unilaterally. The reason cited in reports was that the Kuwaiti press and certain parliamentarians had voiced concerns about the deal, and were intent on probing the transaction with an eye to potentially blocking it.
The K-Dow breakup is, in a number of ways, unfortunate. The journal Middle East Economic Survey perhaps summed it up best when it noted “it is hard to find anyone at all connected with Kuwait’s oil industry who thinks the K-Dow deal was bad for the country.” The deal had been carefully assessed, reviewed, and approved by the prime minister. Nonetheless, the public controversy was sufficient to stop the partnership.
The breakup is strikingly reminiscent of the Dubai Ports World (DPW) controversy in the US – except in reverse. Questioned by US media outlets and members of Congress, the DPW transaction was ultimately re-structured (despite having the support of the Bush administration) to avoid a confrontation with Congress. A Harvard Business School case study later dubbed the affair a “debacle.” In the case of K-Dow, we see a similar phenomenon – except that this time the questioning regulator is from the Gulf.
This turn of events signals that – at least for transactions related to Kuwait and Bahrain (the Gulf states with the most activist parliaments) – consideration of legislators’ concerns is becoming more of a two-way street. Whereas Gulf investors have long been accustomed to the sensitivities of US and EU legislators and media, multinationals dealing with the Gulf have not had a similar challenge. Foreign companies have been able to rely on their Gulf counterparties to fully manage the local politics. Almost none would have imagined that a deal approved by Gulf prime minister would subsequently face hurdles.
Going forward, global firms sourcing capital from certain Gulf states will be well-served to consider potential legislative and media controversy as a potential risk factor. This capability is not alien to multinationals, as legal and corporate affairs divisions are increasingly accustomed to such analysis in the US and EU. What’s new will be the application of this toolkit to the Gulf.
For Gulf investors, the key implication is that they will need to assure global partners that post-agreement controversies will not force deals to fall apart. After the K-Dow affair, international partners may insist on stronger breakup penalties and other measures of assurance. This may mean outreach and consultation with a broader set of local stakeholders.
Tough economic times often breed protectionism legislator activism. The K-Dow affair shows that even Gulf-related transactions may be subject to these pressures, and parties involved will need to add such considerations to their analysis.