Darrell Delamaide is a freelance journalist based in the US.
The acquisition of Huntsman Corp by Apollo Management could serve as a textbook study for capitalism in the early 21st century. The family-owned specialty chemical company got bailed out by a vulture fund in 2002 when it ran into trouble, went public in a successful 2005 IPO – to the profit of the family and the vulture fund – and this summer agreed to be acquired at a handsome premium by a private equity fund – to the even greater profit of the family and the original vulture fund investor. And Apollo, presumably, intends to make a substantial profit when its chemical operations, now including Huntsman, again go public.
In the end, it is all about capital. The Huntsman family desperately needed a new source of capital in 2002 when a sharp rise in raw material costs ran beyond its means. Although now categorised as a specialty chemical company, Huntsman was then more in commodity chemicals and vulnerable to price swings in its feedstocks. The firm's bond prices plunged to pennies on the dollar as the company seemed headed for bankruptcy court. David Matlin, an ex-CSFB money manager who set up his MatlinPatterson vulture fund in that same year, snapped up Huntsman's bonds at a steep discount and then injected more capital into the enterprise, eventually converting his investment into equity.
At the time of the IPO in 2005, MatlinPatterson held on to most of its shares – taking out only $100 million of the $500 million it had invested. Following the IPO, MatlinPatterson owned 35% of the company and the Huntsman family owned 24%, while retaing operational control. Apollo's $28 a share bid for Huntsman represented $2.1 billion for MatlinPatterson – a profit of $1.7 billion on the original investment.
The Huntsman company, which will be paired with Apollo's Hexion Specialty Chemical, now has a captive source of capital from Apollo's deep pockets.
An acquisition auction
For the family, the sale caps nearly four decades of effort building up a company that today is a leading manufacturer in a wide range of specialty chemicals, from polyurethane to epoxy adhesives.
A bid for Huntsman from Leon Black's Apollo group has been an annual ritual since the company went public in 2005 but had never been deemed sufficient.
Two things changed this time around. For one thing, David Matlin wanted to liquidate his stake in Huntsman and was eager to put the company into play. The share price had remained relatively steady during the past two years as investors waited for the company to turn around its profit situation and move firmly into the black.
Basell Holdings, a Dutch chemical company, was on the prowl for an acquisition after losing out on a bid for GE Plastics, and offered $25.25 a share for Huntsman – which the company accepted.
At that point, Apollo returned to the fray, topping the Basell offer with a bid of $27.25. While Basell was mulling its options, Apollo raised the bid to $28 a share to preempt any counteroffer. Basell bowed out and instead focused on a $12.7 billion acquisition of Lyondell Chemical Co, leaving Huntsman to Apollo with a bid that valued it at $6.5 billion (excluding debt), compared with the $5.6 billion value put on it by Basell's original bid.
Private equity vs public company
As Huntsman overcame its earlier crisis and restored profitability, there was no doubt that the company could have continued on its own. "Huntsman has always been considered as solid," says Roger Shamel, president of Consulting Resources Corp, which tracks the chemical industry. "More than likely it would have been fine without assistance from any other company."
Marcus Konstanti, an analyst at German banking firm Sal Oppenheim, says the impetus for the transaction came from the companies trying to acquire Huntsman. "These companies were trying to acquire Huntsman in order to have a more balanced exposure to cyclicality," says Konstanti. With chemicals near the peak of the cycle, it makes sense to acquire assets like Huntsman that are less subject to cyclicality, he adds.
Shamel also noted that private equity companies often are looking for short-term solutions. "Companies such as Apollo have a problem managing complex organisations over the long term," he said. "They want to make things look good by cutting costs and raising prices – if they can." In short, he says, they often function as a "beauty school" to make the company presentable for a public offering.
Konstanti agrees with this theory. "It's a typical pattern of collecting companies in order to combine them, make more of it, prior to exiting after a few years via an IPO or a trade sale," he says.
The family behind the company
The merger into Hexion caps a string of transactions for septuagenarian Jon Huntsman Sr, who transformed the packaging business he started in 1970 (which introduced the clamshell package for McDonald's hamburgers) into a multinational specialty chemicals firm. His is a classic rags to riches story characteristic of American business – from growing up in a family of five living on $120 a month as his father studied at Stanford University on the GI Bill, to becoming the billionaire patriarch of a family with nine children and 70 grandchildren.
Jon Huntsman Jr, Jon Sr's eldest son, is Utah's Republican governor and served as vice chairman of the family company. While Jon Sr served in the Nixon administration, Jon Jr served in the Reagan administration and went on to become US ambassador to Singapore under the first President Bush and a trade ambassador to East Asia under the current President Bush.
The company recently brought a $40 million plant online in Singapore and has a joint venture in Shanghai, as it follows its clientele to the booming economies in Asia.
Second son Peter Huntsman is currently president and CEO of the Huntsman company. Other sons, including David, James and Paul, have worked at the company, along with sons-in-law James Huffman, David Parkin and Richard Durham.
Peter gets considerable credit for the company's moves in the past few years to divest some of its commodity operations and reduce its debts. In a conference call in July to discuss quarterly earnings, after accepting the Apollo bid, he spoke of the company's long-term plans as though he planned to be around to see them through.
While waiting for the transaction to close, Jon Sr and Peter both demonstrated their skill at finding a good deal – by arbitraging their own merger. As turbulent conditions in credit markets put several highly leveraged acquisitions in doubt, Huntsman shares in late summer were trading at a 15% to 17% discount from the $28 acquisition price, even though Apollo had said it had its financing lined up. The two Huntsmans, according to SEC filings, purchased a total of 637,700 shares in the market at prices ranging from $23.25 to $24.50 for a total $15.4 million – and the promise of a quick profit if the acquisition goes through as planned.
In any case, it seems certain that in one fashion or another the Huntsmans will continue their mission – in business, philanthropy, politics or a new field of endeavour.