Chemical Reaction: Caustic Merger Is Off

It looks like Hexion Specialty Chemicals won't be buying Huntsman Corp. after all, now that banks are refusing to fund the deal.

Banks do not plan to fund Hexion Specialty Chemicals’ acquisition of Huntsman Corp., scheduled to close Tuesday morning, according to separate statements from the two companies.

Last week, Hexion said, lawyers for Credit Suisse and Deutsche Bank warned that the banks do not believe a solvency opinion of American Appraisal Associates and a solvency certificate of Huntsman’s CFO meet the condition of the company’s commitment letter.

“Hexion strongly disagrees with the banks’ position and has advised them of their obligation to fulfill the financing commitment for the merger,” the company said in a press release. “While Hexion intends to meet and work with the banks today to try to complete the merger, if the banks do not fund their commitment, Hexion will vigorously enforce all of its contractual rights.”

Hexion, controlled by private equity firm Apollo Management, had planned to acquire specialty-chemical maker Huntsman for $6.5 billion, excluding assumed debt.

On Monday, Hexion said that some Huntsman stockholders agreed to make an additional cash commitment to Huntsman of about $217 million, conditioned upon closing of the merger. Together with other commitments Huntsman announced on September 11 or received later, the total amount of committed payments from Huntsman stockholders is about $677 million.

In addition, investment funds managed by affiliates of Apollo have agreed to make an additional cash equity investment of $210 million in Hexion. Together with a $540 million equity investment Hexion announced on October 9, these funds have now committed $750 million to Hexion.

On Friday, Huntsman announced it had received a written opinion from American Appraisal, which concluded that the company to be formed from the pending merger of Hexion and Huntsman would be solvent. “Specifically, American Appraisal found that the combined Hexion-Huntsman company would satisfy all of the solvency tests commonly used in transactions of this nature,” the company said in its announcement.

Huntsman said it expected to request an updated solvency opinion from American Appraisal for delivery on the closing date, to satisfy the condition contained in Hexion’s agreement with affiliates of Credit Suisse and Deutsche Bank.

The courtship between the two companies has been stormy almost since Hexion made its initial bid in July 2007.

By the following summer, amid the worsening global credit crisis and the tumbling stock market, Hexion was trying to back away from the merger agreement, claiming that Huntsman’s financial condition had materially worsened. In response, Huntsman sought $3 billion in damages.

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