Klesch Claims $402 Million in Damages as Deal Sours

Klesch Group is seeking 310 million euros ($402 million) in compensation from Arkema SA after alleging the French chemical maker failed to provide accurate financial information about PVC assets sold to the investor.

Klesch had already lost 100 million euros six month’s into its investment, and a business plan for the renamed Kem One put together by Arkema was flawed, founder Gary Klesch said in a phone interview. Arkema, in a statement, said it was shocked by the allegations and “categorically” denies them.

“Who knows where this is going but we’ve had enough,” Klesch said by phone. “The first objective is to seek damages.”

The transaction was a landmark one for Europe’s struggling PVC industry when announced in November 2011, allowing Arkema to release an unprofitable business into the hands of an investor that saw cost-cutting and consolidation as a means to restoring profit. Solvay SA is looking into the options for its PVC business and Advent International Corp. has struggled to secure an exit from its Vinnolit business.

Klesch said the foundations of the deal fell apart when Arkema failed to provide monthly results, misrepresented income, and the executive coming over from the French company to lead the business stepped down just after the transaction was signed.

Carve Out

“When it comes to the upstream business it’s a carve out,” Klesch said. “It’s not a business where you have historics, you’re really relying on the seller.”

The Klesch group said it reserves the right to ask an arbitration court to annul the purchase of Kem One, the so-called upstream business that makes chlorine, caustic soda and PVC. The downstream business, which makes profiles and compounds, “operates under satisfactory conditions,” it said.

Shares of Arkema fell as much as 5.1 percent in Paris trading, and were down 2.5 percent at 74.86 euros at 4:45 p.m.

“In the business plan they gave us, they were a lot of entry items of income that we should expect that never materialized,” the Klesch head told Bloomberg. He gave license income as an example of revenue that fell short.

Deal Risk

The Klesch group “had access” to “all the necessary information” to “assess the financial situation and the prospects of this activity, and performed the in-depth due diligence that it wanted,” the French chemicals maker said. “Arkema is launching all the necessary initiatives to defend its rights and prove its good faith to the relevant authorities.

‘‘Given the experience of Arkema’s management in restructuring and disposing of activities, we would be very surprised to see the transaction being canceled,’’ Caroline Brugere, an analyst at Credit Agricole in Paris, said in a research note. The risk of cash outflow related to potential damages may slow an upgrade of Arkema’s credit rating, she said.

Arkema, based in Colombes near Paris, said last week that the discontinued vinyls activities sold in July 2012 had a net loss from operations of 73 million euros last year, and 127 million euros of other losses due to expenses such as warranties, write-offs and costs to establish the business into a self-sufficient structure.