Huntsman LBO Settlement Gives Banks a Reason Not to Fund Deals

By Jason Kelly

June 24 (Bloomberg) -- Banks may be less willing to finance takeovers after Credit Suisse Group AG and Deutsche Bank AG agreed to a $1.73 billion settlement of a lawsuit alleging they interfered with the failed leveraged buyout of Huntsman Corp.

“This was signed at the tail end of the heyday, when everyone was blinded by the glory of private equity,” Elizabeth Nowicki, a professor at the Tulane University School of Law in New Orleans who studies acquisitions, said in an interview. “Banks may be more reluctant to finance deals now, but it’s a reluctance they should’ve always had.”

Credit Suisse, based in Zurich, and Deutsche Bank of Frankfurt said yesterday they’d each pay $316 million in cash to chemicals maker Huntsman to end a trial that began last week. They will also provide $550 million apiece in senior debt to a Huntsman subsidiary that will be repaid over seven years.

Credit Suisse, Switzerland’s biggest bank by market value, and Deutsche Bank, Germany’s largest lender, agreed in 2007 to fund Apollo Management LP’s $6.5 billion purchase of Huntsman. The takeover came weeks before credit markets froze. Huntsman rejected a $25.25-a-share bid earlier in the year from Access Industries Holdings LLC to accept $28 a share from Apollo and Columbus, Ohio-based Hexion Specialty Chemical Inc., which Apollo controls.

Banks, crippled by more than $1.47 billion in losses and writedowns since real estate markets tumbled two years ago, have scaled back lending. Announced private-equity transactions dropped more than 60 percent last year to about $211 billion, according to data compiled by Bloomberg.

‘The World Can Change’

The turn in credit markets and the global economy exposed the dangers of deals like Huntsman’s, for which buyers arrange financing and then seek shareholder approval, said Steven Kaplan a professor at the University of Chicago Booth School of Business.

“Public-to-privates are tricky because you’ve got to commit and the world can change,” Kaplan said. “The banks will write those commitments much more carefully.”

The Huntsman experience may also give pause to boards of directors weighing leveraged-buyout offers, Kaplan said.

“Some sellers will decide not to take that risk,” he said. “It makes the private-equity bid a little less attractive.”

Backing Out

Huntsman Chief Executive Officer Peter Huntsman testified during the Texas trial that its directors overcame qualms about a buyout from Apollo because of “rock solid” bank commitments.

The acquisition was scuttled when the banks backed out of funding the transaction amid concern the U.S. economic decline might leave the resulting company insolvent. Apollo, which paid Huntsman $1 billion to settle litigation over the failed acquisition, wasn’t a defendant in the Texas case. Huntsman is run from The Woodlands, Texas, and Salt Lake City.

Leveraged loans arranged by U.S. banks fell 81 percent this year to $32.6 billion, according to data compiled by Bloomberg. Banks arranged $534.8 billion at this point in 2007, when they competed to finance the largest buyouts on record.

Private-equity firms announced a record $1.2 trillion in deals in 2006 and 2007, according to Bloomberg data. Fueled by cheap credit offered by banks, buyout firms announced seven takeovers worth more than $15 billion each in 2007.

Banks Stuck

New York-based JPMorgan Chase & Co., Citigroup and other investment banks were stuck with more than $230 billion of loans promised to private-equity companies before the credit crisis began in August 2007.

More than $105 billion worth of acquisitions collapsed through December 2008 as banks balked at financing purchases or private-equity firms sought to pay less as stock prices dropped.

Private-equity firms and banks are finding different ways to finance deals, albeit on a smaller scale. Bain Capital LLC and BC Partners Ltd. announced minority investments this week.

KKR & Co., the private-equity firm managed by Henry Kravis and George Roberts, agreed last month to buy Seoul-based Oriental Brewery for $1.8 billion.

“There was a log of commentary over the death knell of leveraged buyouts in earlier cycles,” Christopher Garman, chief executive officer of Orinda, California-based Garman Research LLC, said in an interview. “You could easily see the return of buyouts. Pendulums swing.”

To contact the reporter on this story: Jason Kelly in New York at Jkelly14@bloomberg.net.