Going It Alone

HUNTSMAN CORP. isn’t supposed to be here anymore. It was to become a part of Hexion Specialty Chemicals, and Peter R. Huntsman, its chief executive officer, was slated to become chairman of the combined firm.

The deal didn’t happen, though, and today Peter Huntsman still leads Huntsman Corp. Instead of celebrating a profitable sale, he’s had his hands full with two aborted takeovers and, now, a recession that is trying the skills of most every company in the chemical industry.

Founded by Peter Huntsman’s father, Jon M. Huntsman, Huntsman Corp. has always been a trapeze act, but the past two years have been particularly tumultuous. The drama began in June 2007 when Huntsman agreed to be acquired for $9.6 billion by Basell, the polyolefins maker backed by the conglomerate Access Industries. Three weeks later, the Huntsmans scrapped that deal in favor of a $10.6 billion bid from Hexion, which is backed by private equity firm Apollo Management.

Largely because of antitrust scrutiny related to the two companies’ overlapping epoxy resins businesses, the acquisition process dragged on into the onset of the credit crunch. Hexion lost its nerve and sued to get out of the deal in the Delaware Court of Chancery, arguing that the combined company would be insolvent because of deterioration in Huntsman’s performance. Huntsman countered that Hexion was conjuring up excuses to back out.

The court sided with Huntsman, ordering Hexion to try to close the deal or face heavy penalties. Hexion did, but the banks—Deutsche Bank and Credit Suisse—refused to provide financing even though an independent consultancy, American Appraisal, and Huntsman’s chief financial officer had each provided the banks with solvency certificates.

Huntsman settled with Hexion and Apollo in December 2008 for $1 billion. Peter Huntsman says it settled because the alternative would have likely been a three- to five-year appeal process. “If for some reason Hexion did not survive during that time period, we may have won every ruling, but we would have lost the potential of perhaps collecting anything,” he says.

And Peter Huntsman says the cash will help his company weather the downturn. “I think that everybody would agree that $1 billion at the end of December or the beginning of 2009 certainly is different than receiving a billion in cash a year earlier or perhaps a year from now,” he says.

In retrospect, Peter Huntsman admits that Huntsman’s fortunes might have been different if it had stuck with Basell. “There is no doubt in my mind that the Access offer would have closed sooner than the Apollo offer,” he says. Basell bid $25.25 per share; today, Huntsman’s stock trades at about $3.50. But he says Huntsman would have faced shareholder lawsuits for “years to come” if it hadn’t taken the higher offer from Hexion.

THE STORY isn’t over, though, because now the Huntsmans are going after the banks, which face mediation in Texas next month in Huntsman’s suit against them and a possible trial in June. Peter Huntsman blames the banks for helping Hexion and Apollo lure his company away from Basell. “We accepted the Apollo deal in large part because of the financial backing that the banks had given,” he says.

After Hexion returned to the deal following the court’s order, the banks reneged on their obligations by refusing to close, Peter Huntsman contends. “They entered into a contract,” he says. “They had to abide by that contract.”

Deutsche Bank and Credit Suisse wouldn’t comment on the litigation. But a New York Supreme Court justice, Eileen Bransten, was skeptical of Hexion’s arguments in its own suit against the banks. In a ruling last October denying Hexion’s bid to extend the financing commitment letter, she noted that Hexion spent two months arguing in court that the combined company would be insolvent. “It defies logic,” she told the court, “that the banks would come to a closing where they were committed to put $15 billion on the line without having the opportunity to double-check.”

Given the deepening recession, does Peter Huntsman still think the combined company would have been solvent? “At the time of closing, it absolutely was,” he says. “I don’t know what they would have done with the business. I would like to think that those combined assets, with the amount of liquidity they would have had at the time of closing, would have been a prosperous company.”

Peter Huntsman confides that the tussle with Hexion influenced another recent chemical industry drama: Dow Chemical’s crisis over its acquisition of Rohm and Haas. The circumstances were similar in that Rohm and Haas wanted Dow to abide by its contract and complete the deal by its January deadline. Dow said it needed more time to line up financing.

Dow hired the same attorneys that had worked with Huntsman on the Hexion case, Peter Huntsman says, and Rohm and Haas had Apollo’s lawyers. He believes Dow’s CEO made the right decision in settling when he did. “Andrew Liveris is a good friend of mine,” he says. “I think the world of him. I don’t think that Dow had a leg to stand on in the Delaware Chancery court. A Delaware judge would have beaten him up pretty badly.”

It is Peter Huntsman’s willingness to speak out—in this case with a pointed comment about another company—that sets him, and his father, apart from other chemical executives. Jon Huntsman honed that reputation as the leader of a large private company that he built from scratch. Peter Huntsman leads a publicly traded company but still manages to carry on the tradition.

There is one key difference. Unlike his father, a Republican booster who worked in the Nixon White House, and his brother, Jon M. Huntsman Jr., who is the Republican governor of Utah, Peter Huntsman has a wide liberal streak. “I voted for Obama,” he tells C&EN. “I think they have made some missteps early on with their economic program. But I can’t imagine taking over Bush’s economy in January and being judged six to eight weeks later.”

Huntsman has economic problems of its own. Standard & Poor’s recently downgraded the firm’s debt deeper into junk territory, citing its debt maturities this year and next, plus the gloomy economic outlook. “We expect the global nature of the economic downturn to drive down overall demand for the company’s products in key businesses,” S&P analyst Paul Kurias wrote in a note to clients.

Indeed, Huntsman earnings have taken a hit recently. The firm generated $609 million in earnings in 2008 on revenues of $10.2 billion. But it would have had a large loss if not for $780 million from the Hexion settlement.

Sales volumes for one of Huntsman’s star products, the polyurethane intermediate methylene diphenyl diisocyanate (MDI), decreased by 13% during the fourth quarter. “We had a day in November where, for the first time in the history of that business, we went an entire day in our European market without receiving a single order,” Peter Huntsman says.

Given the decline, Huntsman suspended work on an MDI plant it was planning to build in Rozenburg, the Netherlands. “If we were continuing in the economic environment that we were in in the third quarter of 2008, we certainly would be continuing with that project,” the CEO says.

Delaying the MDI project is part of a broader plan to conserve cash. Huntsman is cutting about $190 million in capital spending this year. Peter Huntsman says that once the company wraps up two projects—a maleic anhydride plant in Geismar, La., and an ethyleneamines joint venture in Saudi Arabia—it will maintain a minimal $150 million in spending for plant maintenance.

Peter Huntsman says he doesn’t want to cut the other leg of future-oriented spending—research and development. The company has increased R&D spending from $115 million in 2006 to $154 million last year. “R&D is all about where you want to be in 24 to 36 months,” he says. One recent fruit of the company’s R&D labor is glycerin carbonate. Based on the biodiesel coproduct glycerin, the chemical is reacted with isocyanates and acrylates for use in coatings, adhesives, and lubricants.

THE COMPANY is also laying off 1,175 workers, some 9% of its total workforce, to save $150 million annually. As part of the program, it is closing its 60-year-old titanium dioxide plant in Grimbsy, England, which uses the costly sulfate process. The company recently opened a new chloride-technology TiO2 plant in Greatham, England.

Peter Huntsman says he would be interested in contributing the struggling TiO2 business to a joint venture. In today’s financial climate, he notes, companies can’t get financing for cash acquisitions. “But I do see an opportunity where you can go out and merge with a competitor and take the synergies,” he says. He points to a number of secondary players in the industry, including his company, Cristal, Tronox, and Kronos, that could rival market leader DuPont if combined.

The company is also restructuring the textile effects business that it purchased from Ciba in 2006 for $253 million. It is in the midst of a program to save $60 million by moving manufacturing from North America and Europe to Asia, where most of the customers are. “It was clear that whoever owned that business had a two- to three-year turnaround project in front of them,” Peter Huntsman says, noting that it represents only 10% of Huntsman’s sales but more than half of its sales force and product line.

Peter Huntsman admits that another such acquisition will have to wait. In today’s cash-constrained environment, he and his father can’t do what they would normally do during a downturn: buy chemical businesses. “I regret that we are not out buying assets right now,” he says. “I would be surprised to see anybody in the chemical industry make a sizable acquisition today.”

When it comes to divestitures, he can’t resist noting how fortuitous Huntsman’s timing has been. At about the time of the Hexion agreement, it sold its European petrochemicals business to Saudi Basic Industries Corp., its North American petrochemicals business to Flint Hills Resources, and its butadiene business to Texas Petrochemicals. These companies have either closed or idled many of the plants they got from Huntsman. “We got nearly $2 billion for assets that by and large have been shut down over the past year,” he says.

Huntsman has been through a lot in the past two years, and its CEO firmly believes it will live to see another business cycle. “As we look at our cash needs and our cash flows, even if this economy doesn’t improve at all for the next two years, Huntsman is certainly going to be a survivor,” he says.