Clouds Loom Over Deal Frenzy

THIS SUMMER has seen some of the largest mergers and acquisitions in the chemical industry's history. But the subprime mortgage crisis that has made cash scarce in debt markets may also influence chemical deals, observers say.

Peter Young, president of the New York City-based investment bank Young & Partners, says the situation may give strategic chemical buyers an edge over financial players. "Leveraged buyout (LBO) or private equity buyers borrow a lot more money, and they depend a lot more on the debt markets," he says.

And Young says whether financial buyers will complete deals depends on how firmly they have secured financing. "The ones that are probably at risk are the ones where they signed the deal but they don't have firm financing lined up," he says.

Tracey Stover, U.S. chemicals leader at the professional services firm PricewaterhouseCoopers, says the debt crisis may merely influence how deals are financed. "We have no reason to believe the credit market will cause the acquiring firms or their targets to walk away from deals that have already been announced," she says. "What you may find is that the specific economics or the timing of those deals or the valuation of those deals could be impacted."

A sign of strength of chemical deals in the current climate may be that Saudi Basic Industries has reportedly been able to sell $1.5 billion in bonds to help pay for its $11.6 billion acquisition of GE Plastics.

Shares of a company that are trading well below the price of an announced deal can be a sign of investor doubts. Huntsman Corp. shares closed at $25.52 last Wednesday, well below the agreed-upon $28.00-per-share bid from Hexion Specialty Chemicals, which is backed by private equity firm Apollo Management. But antitrust concerns about combining the resins businesses of Huntsman and Hexion could be fueling reservations. Moreover, private equity firm MatlinPatterson Global Advisers has already sold 57 million shares of Huntsman stock in advance of the deal's closing.

Last month, Basell, owned by U.S.-based industrial group Access Industries, agreed to purchase Lyondell for $48.00 per share. Lyondell's shares closed at $45.71 on Wednesday.