Hexion v. Huntsman; The Settlement

The parties settled this litigation on Sunday, December 14. Hexion and various Apollo entities will pay Huntsman $1 billion in return for a settlement of all litigation between the parties and general releases. The early view of the settlement is that it is favorable to Hexion and Apollo, given the resounding defeat they suffered in the declaratory judgment action they filed in the Delaware Chancery Court, as reported in my post of October 7, 2008. As the Wall Street Journal reported in its “Heard on the Street” column of Monday, December 15:

“Huntsman is right to take the money. Legal processees are long, unpredictable affairs, and this is no time to be taking chances. Yet the outcome remains surprising. Apollo, having lost an important court ruling in September, had reason to sweat. That Huntsman’s market value dropped by 49% or $2 billion, Monday [December 15] – the difference between the $3 billion originally sought and the eventual settlement – suggests some of the investors expected a fight to the death.”

Actually, Hexion and Apollo faced damages of even greater than $3 billion, given that, after the Delaware Chancery Court’s decision, Hexion and Apollo were confronting “benefit of the bargain” damages to Huntsman for failure to pursue in good faith a consummation of the merger. As I pointed out in my post of October 29, 2008, reporting on Credit Suisse’s and Deutsche Bank’s decision not to fund the merger:

“Given that the per-share merger consideration is $28.00 in cash (plus 8%), that Huntsman has some 234 million (fully diluted) shares outstanding, and Huntsman’s shares closed on October 28 at $12.28, Hexion is facing potential damages to Huntsman of over $4 billion.”

Nevertheless, as they say, a bird in hand is worth two in the bush. The terms of the settlement are, as one would expect, favorable to Huntsman.

A. Terms of the Settlement

The $1 billion settlement payment comes from various sources:

· Hexion shall pay Huntsman the $325 million breakup fee pursuant to the terms of the July 2007 merger agreement with Huntsman;

· Certain unidentified Apollo entities shall purchase $250 million of 7% convertible notes of Huntsman;

· Unidentified Apollo entities shall pay Huntsman $200 million, in settlement of a counterclaim brought by Huntsman in the Delaware Chancery Court for “commercial disparagement;”

· Hexion and certain unidentified Apollo entities shall pay Huntsman $225 million, also in settlement of Huntsman’s commercial disparagement claim.

Why allocate $425 million of the $1 billion in settlement payments to the resolution of Huntsman’s “commercial disparagement” claim? (Vice Chancellor Lamb, in his decision in the case, concluded that Hexion had willfully violated its merger agreement with Huntsman (a contract violation) — he did not rule on Huntsman’s commercial disparagement counterclaim.) Presumably, this is done to qualify such payments for insurance coverage, although this is speculative on my part.

Hexion intends to fund the $325 million breakup fee by borrowing from Credit Suisse and Deutsche Bank under its existing commitment letter with the banks. In all events, at least $500 million of the settlement payments, including purchase of the convertible notes, is to be made by December 31, 2008, with the balance of the payments due and payable on or before March 31, 2009.

The settlement includes a commitment by the Apollo entities to provide financing to Hexion’s parent in the amount of $200 million (presumably to assist the parent in paying the breakup fee).

The settlement includes a resolution of all pending litigation between the parties and broad releases, conditional upon Hexion and Apollo’s payment in full of the consideration called for by the settlement agreement. Huntsman’s action against Credit Suisse and Deutsche Bank, pending in Texas state court, shall continue, with Hexion and Apollo agreeing to cooperate in the prosecution of that action. If Huntsman’s action against the banks is settled prior to trial, then Huntsman shall pay certain Apollo entities 20% of the settlement in excess of $500 million (after deduction for expenses, including attorneys’ fees), capped at a maximum payment to the Apollo parties not to exceed $425 million. If the case is tried, then Apollo’s interest disappears.

B. The Terms of the Convertible Notes

Affiliates of Apollo will purchase $250 million in convertible senior notes (the “Notes”) from Huntsman. The Notes shall be convertible, at the option of the holder, into shares of Huntsman common stock, initially at $7.86 (135% of the closing price of Huntsman’s common stock on December 10, 2008), subject to anti-dilution protection. The Notes bear interest at the rate of 7% per annum. Huntsman may pay interest either in cash or, at its option, in its common shares (at the then current value of the shares equal to the interest payment). The Notes are due and payable on the 10th anniversary of the issue date, in cash or, at the option of Huntsman, in its common shares at their then market price. The Notes are redeemable prior to their maturity for cash, at any time after the 3rd anniversary of the issue date. There is a one-year lock up period on the Notes during which they are not transferable without Huntsman’s consent to any party unaffiliated with Apollo.

Apollo agrees to broad voting and standstill protections for Huntsman, applicable to any transferee unless the Notes or the shares into which they are converted are broadly distributed or privately sold to persons who, after the sale, own less than 5% of Huntsman’s outstanding voting securities.

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This settlement certainly removes an enormous cloud over Apollo and Hexion. It provides welcome cash benefits to Huntsman and leaves open the possibility of additional recoveries against Credit Suisse and Deutsche Bank. Attention will now, therefore, shift to Huntsman’s Texas state court action against the banks. Given that Apollo precipitated this entire mess by claiming that that the Hexion/Huntsman merger was untenable because the resulting entity would be insolvent, the banks must be fit to be tied at now being the sole remaining defendants in this litigation. If they cannot reach a quick and reasonable settlement with Huntsman, expect them to snarl with vigor at both Huntsman and Apollo in the Texas state court litigation.