Engineering News

Hexion deal to buy Huntsman on verge of collapse
Wednesday June 18, 9:17 pm ET

NEW YORK (Reuters) - The $6.5 billion leveraged buyout of U.S. chemical maker Huntsman Corp was on the verge of collapse on Wednesday after private equity firm Apollo Management said bank financing for the deal was in jeopardy due to Huntsman's current financial condition.

Shares of Huntsman fell almost 40 percent in late trading, after Apollo's Hexion Specialty Chemicals unit filed suit against Huntsman seeking to limit its liability in the event that the deal falls apart.

If the deal were to fail it will add to the rising tally of leveraged buyouts that have collapsed recently. This deal is one of the few deals left to close since the private equity boom ended in the summer of 2007.

Hexion said the deal is no longer viable because of Huntsman's increased net debt and its lower-than-expected earnings. Huntsman's first-quarter adjusted earnings fell more than 70 percent from a year-ago.

Last year, Hexion trumped an offer from Dutch rival Basell (BASL.UL) in a bid to acquire Huntsman, including equity and debt the deal is valued at about $10.6 billion.

Investors have been wary about the likelihood of the deal closing and shares of Huntsman have traded at a sharp discount to Hexion's $28 a share offer price over the last few months. Shares of Huntsman fell more to $13.90 in late trading, after closing at $20.86 Wednesday on the New York Stock Exchange.

Hexion said it believes that closing the deal on the basis of the capital structure agreed to with Huntsman would render the combined company insolvent.

It also added that it does not believe the banks will provide the debt financing for the merger contemplated by their commitment letters.

However, Hexion added that it will continue to use its reasonable best efforts to close the transaction, but it does not believe that alternate financing will be available.

Deutsche Bank AG and Credit Suisse Group AG are the banks that are financing the deal, according to regulatory filings.

Spokesmen for Deutsche Bank and Credit Suisse declined to comment, while a spokesman for Huntsman was not available for comment.

Hexion said its board has received an opinion from an independent financial advisor, which states that the combined company would be insolvent, as it would not meet the standard tests of solvency and capital adequacy under the currently agreed capital structure.

"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 Hexion's Chief Executive Craig Morrison, in a statement.

"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," he added.

Besides this deal, just a handful of LBOs from a year ago are yet to close -- the $34.1 billion takeover of BCE Inc (Toronto) and the $6.1 billion acquisition of Penn National Gaming Inc are still on the table -- and there are questions over both of those happening.

The fate of BCE is in the hands of Canada's top court, which delayed a ruling on Tuesday on whether to approve the buyout. Bondholders want it blocked on the grounds it would saddle BCE with too much debt.

Meanwhile, Penn said on Friday the needed regulatory approvals would not be obtained in time for a June 15 deadline, so it extended the date to Oct 13.

The cost of financing LBOs has risen significantly after defaults on subprime loans caused turmoil in the credit and equity markets. Other collapsed deals include the $1.8 billion sale of mortgage and vehicle fleet company PHH Corp and buyouts of equipment renter United Rentals Inc and audio equipment maker Harman International Industries Inc.

In May, the $1.3 billion buyout of Cumulus Media Inc collapsed as the investor group set to buy the radio broadcaster failed to agree on the transaction terms.

Source: Reuters

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