NEW YORK (Reuters) – Apollo Management's $6.5 billion buyout of Huntsman Corp (HUN.N: Quote, Profile, Research, Stock Buzz) is the latest leveraged buyout deal to land in a courthouse, and like other cases this dispute too is likely to end in a settlement with both parties going their separate ways.
Private equity firm Apollo and its Hexion Specialty Chemical unit on Wednesday filed suit against Huntsman seeking to limit their liability in the event that their proposed buyout of the U.S. chemical maker falls apart.
Analysts contend that with Huntsman's current financial condition it is worth only about $14 a share, and a renegotiated deal at a value that is half the original $28-a-share offer would be a bitter pill for shareholders to swallow.
“I do think there is a greater likelihood of a settlement being reached and both companies going their own way. I don't see how the deal is really doable, except at a purchase price that would be intolerable to shareholders,” said Brett Barragate, of the law firm Jones Day.
If this deal falls apart, it would add to the growing list of leveraged buyouts that have run aground, after the buyout boom peaked last summer.
The cost of financing LBOs has risen sharply as defaults on subprime loans caused turmoil in the credit and equity markets. Some of the deals that have collapsed include the $1.8 billion sale of PHH Corp (PHH.N: Quote, Profile, Research, Stock Buzz) and the $25 billion sale of Sallie Mae (SLM.N: Quote, Profile, Research, Stock Buzz), along with the buyouts of United Rentals (URI.N: Quote, Profile, Research, Stock Buzz) and Harman International Industries Inc (HAR.N: Quote, Profile, Research, Stock Buzz).
Experts argue that the lack of clarity surrounding the so-called material adverse effect clause is another reason why both parties are likely to prefer a settlement over a court ruling, especially with billions of dollars at stake.
The clause gives parties the right to walk away from a deal if there is a material change that affects the transaction.
“There is still considerable uncertainty within the legal community as to how these things (clauses) are going to get enforced, as they are pretty ambiguous at times,” said David Denis, a professor at Purdue University.
Apollo contends that Huntsman has suffered a material adverse change, and said an independent financial advisor found that the combined company would be insolvent if the deal were to proceed under the agreed capital structure.
“Clearly Apollo is learning from others' experience in not advancing material adverse change as the central argument, as much as the solvency issue,” said Jones Day's Barragate.
There has been almost no litigation in the United States on the material adverse change clause, so there is no legal precedent on that topic whereas there has been extensive litigation on the insolvency issue.
“I would think that Huntsman will counter-sue. They will try to argue that there hasn't been a material adverse change,” said Alan Salpeter, a partner at law firm Dewey & LeBoeuf.
Huntsman has a good case, but the banks would refuse to finance the deal without a solvency certificate at the time of closing, so it is going to come down to whether or not there is solvency at closing, said Salpeter.
Apollo also argues that the deal is no longer feasible because of Huntsman's increased net debt and its lower-than-expected earnings. Huntsman's first-quarter adjusted earnings fell more than 70 percent from a year ago.
Huntsman plans to fight Apollo's efforts to back out of the deal and said that the private equity firm's actions are inconsistent with the terms of the merger agreement.
Huntsman's board a year ago opted to back Hexion's $28 a share bid instead of a $25.25 offer from Basell BASL.UL.
Jefferies analyst Laurence Alexander said he believes that Huntsman's weaker fundamentals support a $13- to $14-a-share takeout price.
Similarly, HSBC analyst Hassan Ahmed noted that this deal was struck at the height of the buyout boom and overvalued Huntsman, especially given its recent results and current market conditions.
“If I were to sensibly think about it, I would say that they are going to go their separate ways,” he said.
(Reporting by Euan Rocha, editing by Richard Chang)