October 30, 2008

Hexion-Huntsman Deal Hits a Snag: An Unusual Coda?

– by Linda DeMelis,

In July 2007, Hexion Specialty Chemicals, a portfolio company of private equity firm Apollo Management, agreed to acquire Huntsman Corporation for $10.6 billion (including assumed debt). Following the signing of the merger agreement, Huntsman’s financial results began to sour. In June 2008, Hexion sought a declaratory judgment from the Delaware Court of Chancery that Huntsman had suffered a “material adverse event” due to, among other things, the deterioration in its financial results.

A finding of an MAE would have permitted Hexion to terminate without paying the $325 million termination fee. In the alternative, Hexion alleged the banks would not fund under their debt commitments because the combined Hexion/Huntsman entity would be insolvent. Even though there was no “out” for a financing failure, if Hexion failed to close under such circumstances, it would only be liable for the $325 million termination fee.

Last month, as we blogged, the Delaware court issued its much anticipated decision, holding among other things that Huntsman had not suffered an MAE, and that Hexion must specifically perform its obligations under the merger agreement. The court noted that the issue of the solvency of the combined entity was not yet ripe. We have posted many memos on this decision in our “MAC Clauses” Practice Area.

Last week, as noted in this WSJ article, the parties received a much-anticipated opinion that the combined company would be a solvent entity. But now the deal has hit another snag. Two of the financiers of the deal, Credit Suisse and Deutsche Bank, told Hexion Monday night that they don’t believe the opinion meets the condition of the deal.

The parties are still trying to close the deal. But it would be ironic indeed if, after Hexion had spent so much time and legal effort trying to get out of the deal, the transaction failed because of a lack of financing.

Steven Davidoff of the “Deal Professor” writes that the financing issues in the Hexion/Huntsman transaction are part of a larger trend of M&A transactions running into financing difficulties.