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No Comments [ Add Comment ]Huntsman Sr. takes tough stance in Delaware court
By SUSAN PULLIAM andPETER LATTMAN
Jon Huntsman, chairman of Huntsman Corp., doesn't mind playing tough. He once told a hedge-fund manager that it would be his "life's purpose" to make trouble for him if he didn't agree to a proposed restructuring. The manager acquiesced.
Now Huntsman, 71, is battling someone not known for backing down. Last week, a showdown began in Delaware Court of Chancery between his Woodlands, Texas-based chemical company and private-equity tycoon Leon Black's Apollo Management LP. Apollo wants to scuttle a July 2007 agreement to buy Huntsman for $6.5 billion, claiming Huntsman's operations have badly deteriorated. Huntsman says the business is solid and the merger pact ironclad.
The trial is opening a window into the messy aftermath of the private-equity buyout boom, which came to a screeching halt last year when the credit crunch hit. Many deals struck at the end of that era have come unglued. Investors with cold feet are walking away from agreements and companies they were supposed to buy are crying foul.
The Delaware lawsuit pits Huntsman against one of the buyout industry's most hard-nosed dealmakers. Huntsman characterizes the deal's collapse as a poor reflection on the business practices of the buyout industry in general, and of Apollo in particular. He says he regrets trusting Apollo to honor its agreements.
"I will fight this until the day I die," he says, referring to Apollo's effort to kill the deal. "Private-equity firms have taken over America, and we will fight it. These guys are getting away with dishonest behavior, and I won't tolerate it."
Apollo executives, including Black, declined to comment on Huntsman's remarks. A spokesman for the firm declined to comment on the lawsuit.
Apollo's deal for Huntsman came as the buyout boom was entering its final throes. It was structured as a merger between Huntsman and Hexion Specialty Chemicals, an Apollo-owned company. The agreement called for Hexion to swallow a company twice its size in a deal financed entirely with debt. Huntsman estimates his family would have collected $1.3 billion for its 23 percent stake in the company.
Walking away from deals was once considered taboo in the buyout business, but the credit crunch changed that. Roughly 20 percent of leveraged buyouts of U.S. companies in 2007 have been terminated, according to FactSet MergerMetrics. In some cases, buyouts firms have blamed faltering finances of target companies; in others, they accuse banks of reneging on their financing commitments. Some jilted companies say the explanation is simpler -- buyers' remorse.
The battle between Apollo and Huntsman comes at a sensitive time for Apollo, which is preparing to take itself public and has struggled with several of its large investments. Huntsman also has sued Apollo in a Texas state court, alleging that Apollo fraudulently interfered with Huntsman's efforts to finalize a deal with another potential buyer.
Huntsman, a devout member of The Church of Jesus Christ of Latter-day Saints, was born in Blackfoot, Idaho. His father was a schoolteacher, his mother, a homemaker. During his childhood, he and his classmates would be released from school each year, five days after the first frost, to help with the potato harvest.
He has spent 38 years building his chemical company. It now produces specialty plastics such as polyurethane, used in thousands of products ranging from mattresses to golf balls to tennis shoes. He and his wife live in a sprawling home in the hills outside Salt Lake City. They have nine children and 56 grandchildren.
All his children have been involved with the company, either as employees or directors. His son Peter, 45, is chief executive. His eldest son, Jon Huntsman Jr., is Utah's governor. On the wall of his home hang nine plaques, marking the first times each of his children beat him in sports competitions. "I wanted to teach them early to compete," he says, "and to win."
Huntsman, who served in the Nixon administration, says he occasionally goes fly-fishing with Vice President Dick Cheney. He recently urged a group of senators, including his friend Orrin Hatch, the Utah Republican who is a member of the Senate Finance Committee, to introduce legislation aimed at changing certain rules relating to how the profits of private-equity firms and hedge funds are taxed. (The Senate has yet to consider the matter.)
Huntsman says that after the deal was struck, he donated stock then valued at $700 million to a foundation he set up. Several hundred million dollars of that money, he says, is slated for the Huntsman Cancer Institute, a research and treatment facility in Salt Lake City. Huntsman says he is a survivor of mouth, nose and prostate cancer.
Black, 57, grew up in Manhattan, the son of a prominent executive. Friends say the suicide of his father when Black was in college contributed to his determination to succeed on Wall Street.
Apollo's role
Apollo now has $40 billion in assets under management and dozens of portfolio companies, and Black's estimated net worth is about $4 billion. His large art collection alone is worth a fortune.
Earlier this decade, Apollo decided that the chemicals industry represented a good investment opportunity, and it began an aggressive push into the sector.
A buying spree at Huntsman had left the company, then privately held, with a heavy debt load. By 2002, it was in dire need of debt restructuring. Huntsman struck a deal with MatlinPatterson Global Advisers, another large private-equity firm, to convert its debt holdings into a 49 percent stake in Huntsman. But he needed to persuade the hedge funds and banks that held other debt to go along with the deal.
Huntsman pressed them hard in one-on-one meetings, people familiar with the meetings say. That's when he vowed to make trouble for one manager who was reluctant to play ball, one of these people recalls. "I guess I scared the heck out of them," says Huntsman. "I was tough. I had to bring them on board." He says he acted properly.
First meeting
Huntsman's first run-in with Apollo came the following year in a contest for Vantico, a troubled European chemical maker. MatlinPatterson was buying Vantico debt in an effort to take control and merge it with Huntsman -- an effort supported by Huntsman. But Apollo also began buying Vantico debt in the hopes of adding the company to its growing chemical empire. MatlinPatterson ended up winning the company, but had to buy out Apollo at a premium.
Huntsman decided he wanted to sell his company, in part to fund his philanthropic activities. In 2005, he sold shares in the public markets for the first time, a move designed to put a valuation on Huntsman in advance of a sale.
Apollo, which had formed Hexion that year by combining four chemical companies, was a logical buyer. An acquisition of Huntsman would enable Apollo to create one of the world's largest specialty chemical companies.
Talks in 2005
The two began talking in November 2005. By January 2006, Huntsman had agreed preliminarily to accept a $25-a-share offer from Apollo. But in the final hours of negotiation, Josh Harris, an Apollo co-founder and architect of its chemicals investments, told Huntsman executives and lawyers that Apollo was lowering its offer to $24 a share. Harris said the reduction was based on an earnings decline at Huntsman, according to people who heard the conversation. It was a maneuver sometimes referred to on Wall Street as a "down bid."
Huntsman angrily rejected the offer. "We deal throughout the world with people whose word means something," he said in an interview at the time. "But with these firms, it's hard to know today what tomorrow's price will be." At the time, Huntsman said he would prefer to sell to an industrial buyer.
Share issue
On Aug. 2, 2006, Huntsman met Harris at Apollo's New York offices to reopen talks. Initially, Apollo said it could pay $25 a share, Huntsman says. But by the time the Huntsman board met eight days later, Apollo said it was willing to pay only $21 to $23. Again, Huntsman rejected the offer.
Apollo saw the periodic breakdowns in discussions merely as disagreements over price, according to people familiar with the firm's position.
Eight months later, Apollo again offered $25, triggering a bidding war for Huntsman that included Basell AG, a Swiss chemicals company. Huntsman and Basell reached a preliminary agreement at $25.25 a share. Apollo counterbid, eventually reaching $28 a share. Huntsman says the company and board were duty-bound to accept the higher offer.
Several days after the deal was signed, Black and Harris flew to Utah to the Huntsman family's lodgepole-pine mansion on 75 acres in Deer Valley. Huntsman had also invited his board, his friends and Utah Sens. Orrin Hatch and Bob Bennett. Huntsman says he was suspicious of Apollo's willingness to close the deal at that price. "It was important to me that I have Black and Harris shake hands with them at our Deer Valley home," he says. "I wanted them to look (the senators) in the eye and tell them it was a done deal."
Huntsman says that Black assured the group he had a "100 percent commitment to close the deal" and that Harris assured him repeatedly the deal was "solid."
As the two parties worked on the details of integrating the two operations, Huntsman's financial performance began to weaken. Soaring commodity costs and a falling dollar caused net income to sink 84 percent in the first quarter of this year.
Two solvency views
Apollo's lawyers asked advisory firm Duff & Phelps to analyze the solvency of a combined Hexion-Huntsman. Duff & Phelps, which does much of Apollo's valuation work, concluded that even though both companies were then profitable, if they merged they would be insolvent, thanks to the large debt they would take on in the deal. Apollo and Duff & Phelps didn't consult Huntsman managers before issuing the opinion on June 17. Duff & Phelps declined to comment.
The next day, Apollo sued Huntsman in Delaware. It asked the court to rule that Hexion has no obligation to go through with the buyout because Huntsman's weakened condition renders a combined Hexion-Huntsman insolvent. That condition would bar the banks from financing the deal, Apollo claimed, because the banks require a "certificate of solvency."
Huntsman CEO Peter Huntsman says he was in Brussels working with Apollo employees when he heard the news. He says he was stunned. He got on the next plane home.
On Friday, Huntsman Corp. said an outside appraisal firm believes the deal would result in a solvent combined entity.
Huntsman says in a filing Friday with the Securities and Exchange Commission that it expects to ask American Appraisal for a formal opinion at the appropriate time.
Hexion officials describe the timing of Huntsman's SEC filing as "peculiar." They say Huntsman doesn't have a solvency certificate demanded by two banks that would finance the leveraged buyout.
'Adverse effect'
Merger agreements usually include "material adverse effect" clauses. MAE clauses typically allow a buyer to walk away from a transaction if certain conditions change substantially between a deal's announcement and its closing. Since the credit crisis hit, several buyout firms have invoked MAE clauses in an effort to back out of deals. J.C. Flowers & Co., for example, cited one when it sought to end its agreement to buy student lender SLM Corp., or Sallie Mae, for $25 billion. Litigation over that effort was settled, and Flowers walked away from the deal.
In the trial, Apollo must prove that Huntsman's deteriorating finances constitute a material adverse effect -- that is, that there has been a substantial downturn unrelated to overall economic or industry weakness. This would allow it to walk away from the deal without paying a $325 million breakup fee to Huntsman.
The Delaware Court of Chancery has never found an MAE clause sufficient to excuse a buyer from going through with a merger, according to lawyers involved in the Huntsman case.
A ruling in Huntsman's favor won't necessarily result in a deal and could be the beginning of a protracted legal fight.
The Associated Press contributed to this story.
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