UpdateUS Hexion/Huntsman merger will fail - suit

19 June 2008 00:04  [Source: ICIS news]

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HOUSTON (ICIS news)--The deteriorating financial performance of US producer Huntsman has killed the chances of closing its $10.6bn (€6.8bn) merger with Hexion Specialty Chemicals, according to a lawsuit filed on Wednesday in Delaware state court.

Moreover, Hexion said it does not owe Huntsman a termination fee to kill the deal.

In the suit, Hexion outlines how Huntsman's financial performance deteriorated following the signing of the merger agreement. That deterioration, in turn, caused a financial advisor to find that the merged company would be insolvent.

Such an opinion threatened Hexion's ability to finance the deal, Hexion said in the lawsuit.

Credit Suisse and Deutsche Bank agreed to provide debt financing if the merged company were expected to be solvent, Hexion said.

Last year, neither company expected solvency to be an issue - based on Huntman's expected operating performance and debt reduction, Hexion said. Also, such concerns were dispelled by the strength of Hexion's balance sheet and income statement.

However, Huntsman's financial performance has deteriorated since the companies approved the merger, Hexion said.

During the combined fourth quarter of 2007 and first quarter of 2008, Huntsman reported $761m (€487)min earnings before interest, taxes, depreciation and amortisation (EBITDA), Hexion said. That was 41% below Huntsman's pre-signing forecast.

In fact, three of Huntsman's five business segments have performed well below expectations - with Huntsman's pigments and textile effects segment reporting the worst decline, Hexion said.

After considering Huntsman's performance, Hexion raised doubts about the solvency of the merged company, according to the lawsuit. Hexion hired a financial advisor, Duff & Phelps, to determine whether the merged company would be solvent.

Duff & Phelps said the merged company would not be solvent, Hexion said.

Credit Suisse and Deutsche Bank did not have to provide debt financing if the solvency of the merged company is questioned by a financial advisor, Hexion said. Hexion said it will still try to obtain alternate financing and receive regulatory approval for the merger. However, Hexion said it doubts it will find alternate financing on terms comparable to that available from the original debt financing.

Moreover, Huntsman's deterioration meets the criteria set by the merger agreement for a material adverse effect, Hexion said. As such, the company does not owe Huntsman a termination fee.

 “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,” according to a statement by said Craig Morrison, Hexion president.

 “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," Morrison said. "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.”

($1 = €0.64)

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By: Al Greenwood
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