| NEW YORK
NEW YORK As Apollo Management's options dwindle in its struggle over the acquisition of Huntsman Corp (HUN.N), the private equity firm would benefit from a strategy to reduce its substantial legal risk from the deal.
Apollo's Hexion Specialty Chemicals unit agreed to buy Huntsman, a specialty chemicals maker, in July 2007, but the deal has stalled in the courts as Apollo has been unable to wriggle out of its commitment in the aftermath of the credit crisis.
So far, Hexion has been mostly unsuccessful in its various lawsuits over the deal.
First, it failed to convince a Delaware court that it should be able to walk away because the combined company would be insolvent. It argued then that Huntsman's rising debt load and falling earning would bankrupt Hexion.
Most recently, Hexion lost a bid to extend its financing commitment from Credit Suisse and Deutsche Bank after they refused to finance the deal.
Apollo still faces two more lawsuits -- a jury trial filed by Huntsman in Texas and its own attempt in New York to try to compel the banks to finance the transaction.
"I don't think they have a lot of options left," said Alan Salpeter, a partner at law firm Dewey & Leboeuf.
If Apollo loses its lawsuit against the banks and can't close the deal, it could face damages beyond its $325 million break-up fee in the Delaware court. Hexion could have potential liability in the billions in that case, said Columbia Law School professor John Coffee.
The situation is reminiscent of footwear retailer Finish Line Inc's (FINL.O) attempt to walk away from its agreement to buy rival Genesco Inc. (GCO.N), said Dewey & Leboeuf's Salpeter, who worked on that deal.
The battle ended with Finish Line and its bank, UBS AG UBSN.VX, agreeing to pay Genesco $175 million and a 12 percent stake in Finish Line to end the deal.
"It is going to end up being a dispute over money," Salpeter said. "I think they're headed toward a settlement."
The legal dispute comes at an inopportune time for Apollo, which has been preparing for a public listing. Apollo has also had problems with another investment, Linens 'n Things, which it bought in 2006. The chain recently filed for bankruptcy protection.
The legal challenges still facing Apollo could be as difficult as its previous ones.
In the New York lawsuit, the firm has to argue that its banks should be confident in the prospects of the combined company after already trying to back out of the deal.
"This litigation started with Hexion saying, 'This is an impossible transaction because it's overly leveraged and it will be insolvent.' The banks only have to cite them," said Coffee, the law professor.
The task becomes especially difficult in the current environment. Chemical companies have lost an average of about 40 percent of their value since June and face a difficult recession.
Coffee said the Texas lawsuit, which seeks more than $3 billion in damages from Apollo and its partners, could be especially treacherous for the private equity firm, citing the mid-1980s court struggle between Texaco Inc and Pennzoil Co.
In that case, a jury found Texaco illegally enticed Getty Oil Co out of a merger with Pennzoil, ultimately saddling Texaco with $10 billion in damages.
"The threat is that a Texas jury will sit there and look at the principals of Apollo and say, 'Those guys cheated,'" Coffee said.
He said Apollo should look at putting in more equity to entice the banks back into funding the deal.
Others suggest that Hexion could bring the banks back to the table by coaxing Huntsman to agree to a lower deal price, which would be similar to the outcome of the leveraged buyout of Clear Channel Communications earlier this summer.
"Ultimately the deal can close, but it will probably require some concession in terms of the purchase consideration," said a Huntsman investor who asked to remain anonymous. "I think that's just being practical."
But at what price? Huntsman shares are currently trading at $8.49, 70 percent below the $28 a share deal price agreed upon last year.
"There's going to have to be a meeting of the mind between Huntsman and Apollo management as to what a fair value is," the investor said.
(Additional reporting by Megan Davies)