FocusGreed doomed Lyondell deal – US lawsuit

24 July 2009 18:49  [Source: ICIS news]

By Al Greenwood

Lyondell creditors allege greed drove mergerHOUSTON (ICIS news)--The lenders, executives and directors involved in the Lyondell Chemical and Basell merger focused on million-dollar payouts despite clear signs that the company would go bankrupt, according to a lawsuit filed by creditors; key player Merrill Lynch had no comment on Friday on the case.

One of the drivers of the deal was "simple greed", according to the lawsuit.

The US operations of LyondellBasell filed for bankruptcy protection under Chapter 11 on 6 January, roughly a year after the merger closed.

Merrill Lynch helped bring about the merger by producing overly rosy projections, indicating that LyondellBasell could survive a downturn despite carrying debt exceeding $20bn (€14bn), the creditors said. The lawsuit was filed on Wednesday in bankruptcy court in New York.

The projections helped induce company directors and executives to pursue the merger, from which they would earn a combined $133.2m, the creditors said.

The creditors want to recover all of the payouts and fees connected to the $22bn merger.

They demanded that Lyondell shareholders return $11.3bn in proceeds, and lenders return $242m in transaction and other merger fees. Any payments made on the merger debt should be returned, the creditors said.

The creditors also accused the lenders, executives and directors of violating their obligations to look after the best interests of Lyondell and Basell. As such, the creditors are seeking unspecified damages. 

The events leading up to the merger date back to May 2005, when Leonard Blavatnik acquired Basell through his firm Access Industries, the creditors said. Blavatnik planned to leverage Basell to create a global petrochemical conglomerate.

However, Blavatnik repeatedly failed to take over more chemical firms. SABIC outbid Access for GE Plastics in May 2007. Access failed again when the Apollo Group outbid it for Huntsman in July 2007.

When Lyondell became a target, Blavatnik was determined to acquire it at any price, according to the lawsuit.

Through Basell, Access repeatedly increased its offer price, until Lyondell accepted a takeover bid of $48/share, the creditors said. With assumed debt and fees, the price totalled $22bn.

The offer was a blowout - well above anything reasonable, the creditors said.

Moreover, Blavatnik was making the offer when all leading analysts were predicting a downturn in the petrochemical industry, according to the lawsuit.

The prospects of the merger even worried Blavatnik's executives; Access executive Ajay Patel thought the $48/share offer was a joke, the creditors said.

Patel was not named in the lawsuit. Neither was Basell CEO Volker Trautz, who opposed the deal, the creditors said.

Nonetheless, according to the lawsuit, Blavatnik was driven to pursue the deal, in part, because he was financing the merger entirely with debt - putting little of his own money at stake.

In addition, Blavatnick would gain a $333m profit due to his ownership of Lyondell stock, the creditors alleged.

Merrill Lynch and the other investment banks also stood to gain millions through various transaction fees, the creditors alleged. Moreover, they could offload much of the risk by syndicating the loans, earning more fees in the process. 

Lyondell and Basell agreed to the merger in July 2007. Soon, Lyondell earnings began to tumble.

Days earlier, crude oil reached a record price of $147.27. The run-up in crude eroded Lyondell's margins for its refining and naphtha-based petrochemical operations, the creditors alleged.

Lyondell's weakening performance doomed the banks' attempts to syndicate the loans, and they were left holding much of the debt, according to the suit.

 LyondellBasell then plunged into a liquidity crisis, with its cash balances falling to $1bn from $2.3bn, the creditors alleged. The company ran out of cash by mid October.

Access said in a prepared statement it was pleased that the court was requiring the bankruptcy to proceed quickly towards resolution. In all, the bankruptcy and litigation was costing the company $3m/day.

"Access has and will continue to support LyondellBasell through its restructuring process," the company said. "Access remains confident that LyondellBasell will emerge from Chapter 11 in a strong, competitive position."

($1 = €0.70)

For more on Lyondell visit ICIS company intelligence
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By: Al Greenwood
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