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Apollo’s proposed take-private of Huntsman, via its portfolio company Hexion, continues to move forward despite apparent setbacks due to expected regulatory concerns, two sources familiar with the situation told dealReporter. On 4 October, Hexion and Huntsman received a second request from the Federal Trade Commission (FTC) requesting additional information, in connection with the proposed merger of the companies. According an 8k issued by Hexion, “both parties intend to continue to cooperate fully with the FTC.”
A closing of the deal, formerly reported by this news service to arrive no sooner than 1Q08, could be pushed back until the end of 2Q08, an industry banker not involved on the deal but following the situation said. However, he noted that there is still hope that the deal could be finalized by March, but he said that to his knowledge this remained an optimistic belief.
According to one of the sources, contractual provisions that were negotiated between Apollo and Huntsman are very strong as it relates to a commitment by the buyer to close the deal. Asked whether he thought Apollo’s commitment remains as steadfast as it was when the provisions where decided upon, the source said “I haven’t seen anything from Apollo that would suggest anything other than their full commitment to see this deal come together.”
Relative to Apollo’s commitment to acquiring Huntsman, in spite of regulatory hurdles revolving around overlaps between the companies, the banker said these hurdles were not a surprise to Apollo, and had been expected by the fund before it committed to the deal.
Regarding whether the fund could be experiencing a sense of buyer’s remorse, the banker said Huntsman “still fits perfectly well with what [Apollo] wants to do with Hexion.”
Still, an independent lawyer noted that despite the tight language used in the merger agreement, the fund also has a reverse break-up fee it could opt to use as an out. In discussing the language in the agreement, the lawyer said that typically “it’s either you go hell or high water or you have a reverse break up fee, but not both.”
This news service previously reported that areas of concern, from an antitrust perspective, for the Hexion/Huntsman tie-up were believed to be in the buyer’s epoxies business and the advanced materials business of Huntsman, which is also epoxy-based. It was also reported that Apollo could walk away from the deal in the event that the requested remedies prove diminishing of expected synergies.
According to the definitive proxy, Huntsman “shall cooperate with [Hexion] and shall use its reasonable best efforts to assist [Hexion] in resisting and reducing any divestiture action.” The definitive proxy goes on to state that Hexion “may take any reasonable action to resist or reduce the scope of a divestiture action, even if it delays such expiration to a date not beyond the termination date” of 5 April, 2008 or up to 180 days later. If the decided upon divestiture would constitute “a breach of this Agreement,” Hexion has agreed to allow such divestiture, at the discretion of Huntsman, if it was conditioned to the closing of the merger, according to the definitive proxy.
Meanwhile, according to Huntsman’s 10K issued in March, the company considers Hexion a competitor in numerous product lines, namely formulated polymer systems and complex chemicals and additives used in coatings systems, basic epoxy resins used in industrial protective coatings, electrical insulating materials, and structural composites. Of the above mentioned segments, the same filing indicates that “competition in basic liquid and solid epoxy resins is primarily driven by price,” and that the two major manufacturers of these basic epoxy resins are Hexion and Dow Chemical.
Moreover, according to the banker, the real overlap between Huntsman and Hexion boils down to two specific epoxy businesses: Resolution Performance Products (RPP), which was acquired by Hexion from Shell Oil in 2000, and Huntsman’s Advanced Materials business unit, Vantico, which was CIBA’s former epoxy resins operation. Those two businesses, said the banker, have always competed and supplied to one another. Dow, he noted, is the only other producer of the specialized resins.
Aside from those two businesses, the banker said, “I don’t think there are any other overlaps in the portfolio.”
Asked if antitrust issues such as deciding which divisions of the companies would have to be divested could push the deal back, the banker said it would depend on how long it would take the parties to gather and submit the necessary information to regulators, and whether the buyers would be willing to cure the overlaps by opting to sell one business or the other. The banker commented that he would not be surprised if Apollo opted to let go of one of the businesses, but noted that he did not believe the funded wanted to divest anything.
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