Huntsman Corp. | HUN
Hexion Specialty Chemicals Inc.

Deal value $6.8 billion

Spread 10/22/08 17.36, or 146%

Credit Suisse Group and Deutsche Bank AG stepped into Delaware Court of Chancery last week to prevent Hexion Specialty Chemicals Inc. from effecting an extension of its debt commitment letter with lenders for its $10 billion acquisition of Huntsman Corp. Vice Chancellor Stephen Lamb was not pleased.

The banks prevailed after a fashion, even though Lamb told them they did not belong as interveners in the case -- not in Delaware, the venue for the dispute over the Huntsman-Hexion merger agreement. Rather, Lamb suggested the time had arrived for the parties to move to New York, the venue for any dispute over the Hexion debt commitment with the banks. The litigation will now play out in New York Supreme Court.

On Oct. 16, Hexion gained an order from Lamb declaring it validly started the debt marketing period on Sept. 30 for the $15 billion the banks committed to the deal. In a Sept. 29 decision, Lamb concluded that Hexion and owner Apollo Management LP had intentionally breached the Huntsman merger pact by delaying obtaining antitrust approval from the Federal Trade Commission and by seeking an opinion that the merged company would not be solvent.

Lamb ordered Hexion to conclude the antitrust process and begin the marketing period by either Oct. 1 or the second day after getting FTC approval, whichever came first. The trick was that the merger agreement requires the marketing period not to begin until after all conditions, including antitrust approval, are met. Lamb initially granted the order, allowing in the Oct. 21 hearing that he was not fully aware of the details over the date.

The Huntsman merger agreement has an Oct. 2 termination date that can be extended if the 20-business-day marketing period began before then. By establishing that it had begun marketing, Hexion pushed the termination date to Oct. 29. The debt commitment letters terminate 30 days after the merger termination date. So, if Hexion pushed off the merger termination date, it could extend the debt commitment letter as well. Lamb seemed miffed, vacating his own order that the marketing period had begun Sept. 30, chastising Hexion for not getting Federal Trade Commission approval sooner and setting aside Hexion's request for a declaration on the initiation of the marketing period. His message is that the banks and Hexion should go to New York to resolve their differences over the debt commitment.

But Lamb's Sept. 29 decision that Hexion and Apollo intentionally breached the merger pact hangs over them. If they cannot close the Huntsman deal, they face possible damages in Delaware or Texas of perhaps $4 billion. This would wipe out Hexion; Apollo principals are also liable. (What position does this put Apollo in over the length of this litigation regarding raising capital?) Meanwhile, the banks don't want to incur a significant loss by funding the deal.

Hexion must now bury its June insolvency opinion from Duff & Phelps LLC and, armed with an equity infusion from Apollo and cash from the Huntsman family and hedge funds with large Huntsman positions, approach the banks with a revised deal. The clock runs out on the commitment letter Nov. 1, but look for a temporary restraining order from a New York judge on Oct. 29 to prevent the banks from cutting and running.