Huntsman, Hexion Battle Over Merger

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What seemed a slam-dunk merger between chemical companies Huntsman and Hexion, an affiliate of Apollo Management L.P., has instead turned into an air ball, with both sides filing lawsuits against the other. Hexion seeks to break it off, while Huntsman filed a suit Monday against Apollo and partners Leon Black and Joshua Harris for fraud and tortious interference in inducing Huntsman to terminate a previous merger agreement with Basell in favor of Hexion.

Hexion Specialty Chemicals Inc. filed suit in Delaware, claiming its proposed merger with Huntsman was no longer viable because Huntsmans increased net debt and lower-than-expected earnings would make it impossible to obtain the necessary financing. The merger would result in an insolvent company, according to Hexions June 18 announcement.

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Were going to the courts to say, Help us understand and preserve our rights under the merger agreement, and we are seeking a judgment that the merger cant go forward because the financial structure as outlined in the merger agreement no longer works, Hexion spokesman Peter Loscocco told Lube Report. We dont really have any sort of timeframe for the legal process.

Columbus, Ohio-based Hexion, an affiliate of Apollo Management L.P., said it doesnt believe banks will provide the debt financing for the merger contemplated by their commitment letters. Loscocco said Huntsmans decline in earnings and increase in net debt – compared to the numbers the merger deal was based on – were key factors, expected to continue for a significant period of time. That constituted a material adverse effect as defined in the merger agreement, according to Hexion.

Now if you put these two companies together, we just dont think that it would be able to get financing, he said. We have a third-party opinion from Duff and Phelps that says these companies would be insolvent if we put them together. We would need a solvency opinion in order to get financing.

On Monday, Huntsman said it filed its suit in Conroe, Texas, seeking a jury trial to determine the defendants liability to Huntsman for actual damages exceeding $3 billion, plus exemplary damages. Often called punitive damages, exemplary damages are requested in a lawsuit that alleges that the defendant’s willful acts were malicious, oppressive, fraudulent, wanton or grossly reckless.

It is now clear that, to get Huntsman to terminate its merger agreement with Basell, Apollo falsely represented to Huntsman its commitment to closing a merger with Hexion at $28 per share, when it really intended all along to then delay the process and create enough problems with the transaction to bring us back to the table at a lower price, said President and CEO Peter Huntsman. We intend to pursue every legal action required to hold Apollo, Black and Harris responsible for their ruinous actions.

Huntsman on Thursday had responded to Hexions announcement, declaring it would enforce its rights under the merger agreement and seek to consummate it.

Hexion on Monday called Huntsmans lawsuit wholly without merit and took the company to task for where it chose to file. Huntsmans Texas suit violates a clear provision of the merger agreement which requires that any litigation be brought exclusively in the State of Delaware, Hexion said. The company also noted that Huntsman didnt dispute Hexions contention the combined company would be insolvent.

The companies dont see eye-to-eye on Huntsmans financial situation.

While the impression created by Apollos recent statements about Huntsmans financial performance and strength almost seems designed to inflict damage to our company and its relationships with its employees, suppliers and customers, in fact Huntsman is a strong and profitable company, with ample financial resources to continue operating our business, Peter Huntsman said. He said the companys May results were stronger than in April, and was a trend the company expected to continue as it adjusts pricing to offset higher raw material and record energy costs.

In June 2007, polyolefin producer Basell announced plans to acquire Huntsman for $9.6 billion, or $25.25 per share. In July 2007, Huntsman canceled the agreement with Basell in favor of the $10.6 billion, or $28 per share, offer from Hexion. At that time, Huntsmans board of directors authorized delivery of a notice of termination of the Basell agreement, along with payment of a required $200 million break-up fee – $100 million of it funded by Hexion.

Huntsmans stock in the last year peaked at $28.40 per share on July 9, 2007 on the New York Stock Exchange. After Hexions June 18 announcement that it wanted out of the merger, Huntsmans stock price tumbled from $20.88 to $12.98 per share yesterday.

Lubricant and fuel additives are key applications for Huntsmans polyetheramines. They are used as carrier oils, detergents and dispersing agents in lubricant and fuel compositions. BASF is the other major global supplier of the chemical.

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