Apollo goes to court over Huntsman

The buyout firm and portfolio company Hexion have begun court proceedings in an attempt to abandon the $10.6bn purchase of chemical manufacturer Huntsman citing a material adverse effect. Yesterday, an offer of nearly $1bn from investors in order to close the transaction was declined by Hexion.

Apollo Global Management portfolio company Hexion Specialty Chemicals and chemical manufacturer Hunstman have begun a court battle after last-minute efforts by the Huntsman family and Huntsman investors to complete a merger of the two companies failed.

Hexion filed a lawsuit in the Delaware Court of Chancery in June asserting that Huntsman has had a material adverse change in its business, in an attempt to walk away from a $10.6 billion deal agreed in August 2007.

On the basis of “substantial deterioration in Huntsman's financial performance, the increase in its net debt and the expectation that the material downturn in Huntsman's business will continue for a significant period of time”, Hexion claimed in the lawsuit that Huntsman has suffered a material adverse effect (MAE) as contractually defined.

Hexion also asserted that the combined company would be insolvent as a result of the debt load built into the deal. The company said it did not believe the banks would provide the debt financing agreed in their commitment letters and did not believe alternate financing would be available.

On 28 August, a group of Huntsman shareholders, including the Huntsman family, launched an “independent initiative” to provide at least $500 million (€355 million) of capital for the transaction.

The shareholders included hedge funds Citadel Investment Group, DE Shaw and Pentwater Capital Management as well as distressed private equity investor MatlinPatterson.

In response, Hexion said in a statement that “their proposal does not come close to making the combined company solvent” and the company is seeking to terminate and not renegotiate the transaction.

A follow-up offer by the investors to Hexion added a backstop commitment of $416 million in cash to be added to the combined company’s balance sheet at closing. That offer was also rejected by Hexion which said that the increased offer was not “remotely sufficient” to attain solvency.

Yesterday, both parties filed pre-trial briefs and court proceedings began.

Hexion said in its brief that Huntsman recognised during merger negotiations that the deal was subject to the risks of failed financing and the occurrence of an MAE in the year or more prior to closing.

“Hexion will have to live with the fact that it is out $176 million [in fees and expenses] for a well-intentioned venture that failed. But it owes Huntsman nothing,” Hexion said. Hexion claims that its liability to Huntsman is limited to $325 million.

Hunstman argues in its brief that Hexion’s claims are illegitimate and no MAE has occurred. The company says that solvency is not a condition to the deal’s completion making such arguments “meritless as well as irrelevant”.

In regards to financing, Huntsman states that there is no financing condition to the merger. The company adds that Hexion did not make “reasonable best efforts” to complete the transaction nor did Hexion refrain from preventing the consummation of financing. Instead Hexion “secretly” hired litigation counsel with the aim of abandoning the agreed transaction.

Huntsman also highlights Apollo’s “remarkably improper approach” to filing its lawsuit without consulting with Hunstman or notifying the financing banks as contractually required.

Last August, Hexion agreed to acquire all outstanding Huntsman shares for $28 each in cash plus debts of $3.7 billion. In order to agree to the deal, Huntsman terminated a previously agreed buyout offer from Basell, a plastics company owned by Russian billionaire Len Blavatnik. Hexion and Huntsman each paid half of the $200 million break-up fee to Basell.