UPDATE: Apollo, Huntsman Go At It
Apollo and Hexion undertook the lawsuit in order for the court to decide whether a material adverse effect at Huntsman has taken place.
June 20, 2008
Call it another day, another lawsuit for the private equity business.
New York private equity firm Apollo Management and its portfolio company, Hexion Specialty Chemicals of Columbus, Ohio, have filed suit against Woodlands, Texas-based chemicals maker Huntsman Corp., claiming that its increased debt and deteriorating financial results would result in an insolvent company if its $10.6 billion acquisition of Huntsman was completed. As a result, the acquirers expect the syndicate of lenders involved in the transaction will not finance the purchase, according to Hexion.
Huntsman, a 13,000 employee business, produces chemicals through four business segments: polyurethanes, materials and effects, performance products and pigments. Last year, the Texas chemicals company generated $10 billion in revenue from sales of chemical formulations including amines, surfactants, epoxy-based polymer formulations, textile chemicals, dyes and other products. Its chemicals are purchased by companies operating across a wide range of industries including aerospace, automotive, construction and consumer products, electronics, medical, packaging, power generation and textiles.
Hexion struck an agreement on July 12 to acquire Huntsman, which is advised by Merrill Lynch, for $28 per share, besting rival bidder Dutch chemical concern Basell Holding’s offer of $25.25 a share.
MatlinPatterson Global Opportunities Partners holds a 20.4% stake in Huntsman (MatlinPatterson sold 56.9 million shares in a secondary offering in August, reducing its stake from 47.2%) or 47.8 million common shares, according to regulatory filings. The next largest institutional shareholders are The Jon and Karen Huntsman Foundation, which own 9.3% and D.E. Shaw & Co., the holder of an 8.4% stake.
Moreover, the New York Stock Exchange-traded company said that its board received an opinion from Duff & Phelps noting that the resulting capital structure of the transaction as agreed upon last July would make the combined company “insolvent.” Moody’s Investors Service supported that assessment, issuing a report that stated if the transaction were to be completed it is “highly unlikely” that the combined company would be in compliance with its financial covenants.
Additionally, the debt financing arranged by Credit Suisse and Deutsche Bank to support the purchase of Huntsman would not be sufficient to complete the purchase. But, the size of the debt package is unclear since figures were not disclosed in a subsequent proxy filing.
Officials from Credit Suisse and Deutsche Bank did not return calls seeking comment on the deal’s debt financing details.
Apollo and Hexion, meanwhile, undertook the lawsuit in order for the court to decide whether a material adverse effect at Huntsman has taken place, seeking to avoid to the merger of the two companies and the payment of a $325 million termination fee, according to Moody’s. The merger agreement also allows for Huntsman to pay Hexion a $225 million termination fee if the transaction is terminated by Huntsman, according to regulatory filings.
Hexion’s agreement with Huntsman originally had a mutual termination date of April 5.
In January, Hexion extended its purchase termination date to July 4. Both Huntsman and Hexion are dealing with energy and feedstock price increases, while on-going price increases will augment the work capital of both businesses over the next three months, according to Moody’s.
“While both Hexion and Huntsman can be successful as separate companies, they cannot now support the debt load that was agreed to at the time the transaction was put together,” said Craig Morrison, chairman and chief executive of Hexion.
Huntsman president and chief executive, Peter Huntsman, fired back Thursday with a statement of his own: "We believe Hexion and Apollo's actions are inconsistent with the terms of the merger agreement and the obligations to Huntsman and its shareholders. These actions appear to be a blatant attempt to deprive our shareholders of the benefits of the merger agreement that was agreed to nearly a year ago.”
The company said it will aim to consummate the merger based on the terms of the merger agreement struck in July 2007.
Standard & Poor's noted on Thursday that it still has Huntsman and Hexion Specialty Chemicals on negative watch, where it put the two companies in light of the merger deal being signed last July.
The last high-profile mega-buyout involving legal wrangling took place between Clear Channel Communications and a lender group to Boston private equity houses Thomas H. Lee Partners and Bain Capital Partners over the buyout of the San Antonio, Texas-based radio station operator. The matter was settled in May.
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