Chemical Warfare

Hexion pulls out all stops to squash its merger with underperforming Huntsman Corp.
Stephen TaubJune 20, 2008

The credit crisis combined with the stock market’s big decline has caused another agreed-upon deal to fall apart. However, the target company in the would-be merger is not going away quietly.

Hexion Specialty Chemicals, an affiliate of the private-equity firm Apollo Management, has filed a lawsuit seeking to back away from its $10.6 billion merger agreement with specialty-chemical maker Huntsman Corp., claiming the company’s financial condition has materially worsened.

Hexion asserted that Huntsman increased its net debt and that its earnings are now lower than expected. “While both companies individually are solvent, Hexion believes that consummating the merger on the basis of the capital structure agreed to with Huntsman would render the combined company insolvent,” said Hexion in a press release.

As a result, Hexion said it does not believe banks will provide the debt financing for the merger contemplated by their commitment letters. It added that while it will continue to use reasonable best efforts to close the transaction, which include obtaining antitrust and regulatory approvals, it does not believe that alternate financing will be available.

Hexion alleged in the lawsuit that in light of the substantial deterioration in Huntsman’s financial performance, the increase in its net debt, and an expectation that the downturn will continue for some time, Huntsman has suffered a material adverse effect as defined in the merger agreement.

Declaring an MAE is critical for a company to back away from a previously agreed-upon deal. Otherwise, Hexion would be on the hook for a $325 million termination fee, Moody’s Investors Service noted in a report published Thursday.

“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, Hexion’s chairman and CEO. “We continue to have enormous respect for Huntsman, the Huntsman family, and management team and still believe that a combination of the two companies would offer significant strategic benefits. However, the financing for the acquisition is predicated on a certain level of financial performance and, given the increase in Huntsman’s total debt and decrease in earnings, Hexion does not believe that the transaction can be completed.”