JOSEPH CHANG Global Editor ICIS Chemical Business The State of the Chemical Industry + M&A Outlook...
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JOSEPH CHANGGlobal Editor
ICIS Chemical Business
The State of the Chemical Industry
+ M&A Outlook
The State of the Chemical Industry
+ M&A OutlookISM Chemical Group
Mid-Winter ConferenceGalveston, Texas
February 27, 2008
ISM Chemical GroupMid-Winter Conference
Galveston, Texas
February 27, 2008
Forecasts from March 2007
Forecasts from March 2007
Verdict:Forecasts:
Commodity profits strong, stocks to rise
Somewhat true
True
True
Specialty profits continue momentum, but cautious on stocks
Attempts to take public companies private
On the money!Record year for M&A
2007 – A Tale of Two Halves2007 – A Tale of Two Halves
1H 2007
US economy started out strong
Supply/demand fundamentals favorable in chemicals
M&A activity at a record pace
Credit widely available at cheap rates
The Cookie CrumblesThe Cookie Crumbles
2H 2007 – Early 2008
Credit crisis triggered by collapse in US subprime mortgage market
Slowing US economy and potential for recession
Crude oil surges to $100/bbl
Impending petrochemical overcapacity
Q4 2007 Earnings Snapshot
Q4 2007 Earnings Snapshot
Q4 2007 EPS % Change
Dow Chemical $0.84 -14%
Nova $1.12 +955%
Eastman $ 1.27 +11%
Celanese $ 0.93 +52%
FMC $0.59 -3%
DuPont $0.57 +27%
Rohm and Haas $ 0.91 +11%
Hercules $ 0.31 +35%
Albemarle $ 0.60 -8%
Source: Yahoo! Finance
Wall Street OutlookWall Street Outlook
E2008 % Change Stock price* P/E**
Dow Chemical $3.50 -7% $38.96 11.1x
Nova $3.47 -9% $30.73 8.9x
Eastman $4.99 -1% $66.73 13.4x
Celanese $3.72 +9% $40.78 11.0x
FMC $3.82 +25% $56.15 14.7x
DuPont $3.45 +6% $46.46 13.5x
Rohm and Haas $3.87 +13% $53.98 13.9x
Hercules $1.70 +15% $18.55 10.9x
Albemarle $2.75 +15% $40.15 14.6x
Source: Yahoo! Finance*Prices as of close of 2/20/08** Based on estimated 2008 EPS
US Petrochemical CycleUS Petrochemical Cycle
Source: Probe Economics, Inc.
Why the Peak Never Came in 2003
Why the Peak Never Came in 2003
peak to occur in 2002 or 2003, and be predominantly monomer driver. By this time NOVA
Chemicals will have approximately 2.5 times the polymer production capacity we had in1995.
construction and acquisition, has been timed to take full advantage of the expected
Many analysts expect the next
Our growth, through
peak in the earnings cycle.
Source: Nova Chemicals
2003 – A Peak in Pessimism2003 – A Peak in Pessimism
“In the previous ethylene trough of 1991 to 1992 and the
peak of 1995 to 1996, US chemicals have been fortunate enough to enjoy a favorable oil
to natural gas price ratio. Those lucky days seem to
have gone. Higher ethylene feedstocks could mean that
cash margins at the next cyclical peak are lower than in
previous peaks.”
June 2003
“In the previous ethylene trough of 1991 to 1992 and the
peak of 1995 to 1996, US chemicals have been fortunate enough to enjoy a favorable oil
to natural gas price ratio. Those lucky days seem to
have gone. Higher ethylene feedstocks could mean that
cash margins at the next cyclical peak are lower than in
previous peaks.”
June 2003
“The US is the highest cost ethylene producing region
in the world at current natural gas price levels.
Directionally, we expect the North American
petrochemicals industry to become a high-cost
globally uncompetitive producer serving a large
local market.”
June 2003
0
10
20
30
40
50
60
Jan-0
3
Mar
-03
May
-03
Jul-0
3
Sep-0
3
Nov-0
3
Jan-0
4
Mar
-04
May
-04
Jul-0
4
Sep-0
4
Nov-0
4
Jan-0
5
Mar
-05
May
-05
Jul-0
5
Sep-0
5
Source: Yahoo! Finance
Ultra-Bearish Forecasts
Jun 2003
Ultra-Bearish Forecasts
Jun 2003
Nova Chemicals (NCX)Nova Chemicals (NCX)
Capital Spending as % of Depreciation
Major/Commodity Chemicals
Capital Spending as % of Depreciation
Major/Commodity Chemicals
Source: ICIS Chemical Business
-100%
-50%
0%
50%
100%
150%
200%
250%
300%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 1H2007
Dow Chemical DuPont Eastman Solutia Nova Lyondell Georgia Gulf
Why a Crushing Downturn is Unlikely
Why a Crushing Downturn is Unlikely
North American producers have vowed never to build new local capacity
High natural gas prices – no reason to build
Strong balance sheets
Weak US dollar
Runway on the DollarRunway on the Dollar
Export to ProsperityExport to Prosperity
US chemical exports up 14% to $154bn in 2007
US chemical trade deficit shrinks from $7.7bn to just $1bn in 2007
Ex pharma, trade surplus nearly doubles to $19.2bn
CompanyNet DebtEnd 2000
Debt/Capital2000
Net DebtEnd 2007
Debt/Capital 2007
Dow $6.2bn 40% $8.0bn 29%
DuPont $8.3bn 38% $5.9bn 35%
Eastman* $1.9bn 51% $688m 24%
Nova $1.5bn 43% $1.7bn 60%
Rohm and Haas*
$3.7bn 50% $1.9bn 32%
Ready to Weather a Storm?Ready to Weather a Storm?
*As of Q3 2007Source: SEC Filings, ICIS Chemical Business
Predictions 2008Predictions 2008
No US recession, but growth slowdown
Commodity chemical companies will post surprisingly solid profits as the downcycle is delayed again. Stock prices will rise
Specialty chemical firms to continue earnings momentum. Stock prices to rise
Mergers and AcquisitionsWhat’s Next After the Credit
Crisis?
Mergers and AcquisitionsWhat’s Next After the Credit
Crisis?
2007 – A Record Year2007 – A Record Year
Source: Young & Partners
Global Chemical M&A
bn
Mega Deals 2007Mega Deals 2007
BuyerBuyer TargetTarget PricePrice
Akzo Nobel ICI $16bn
SABIC GE Plastics $12bn
Basell (Access Industries) Lyondell Chemical $13bn
Hexion Specialty Chemicals (Apollo Management)
Huntsman $6.5bn
PPG Industries SigmaKalon $3bn
Source: ICIS Chemical Business
28% of total number of deals versus 15% in 2006
36% of dollar volume vs. 17% in 2006
High leverage with low rate, covenant-lite debt
Banks and debt holders take the big risk
Private Equity Revival1H 2007
Private Equity Revival1H 2007
Source: Young & Partners, ICIS Chemical Business
Credit crisis has slammed the brakes on mega deals
Credit markets recovering, but very slowly in the high yield market
All quiet on the bond front
2H 2007: Bonds Shoot Blanks
2H 2007: Bonds Shoot Blanks
POP!
Rohm and Haas $1bn (Sept 2007)Investment grade
SABIC Innovative Plastics $9.2bn (Aug 2007)Special situation – banks want relationship
with Saudi government
Debt Offerings – Where Art Thou?
Debt Offerings – Where Art Thou?
Ticking Time BombTicking Time Bomb
LyondellBasellDeal completed using $8bn in interim
financingFinancing agreement stipulates that the
interest rate will rise by 0.5% every 3 months, starting in May 2008
Apollo (Hexion)/HuntsmanExtended agreement with Huntsman
stipulates that the purchase price of $6.5bn will rise by a rate of 8% annually starting on July 4, 2008
SHOW ME THE MONEY!SHOW ME THE MONEY!
Solutia sues Citigroup, Goldman Sachs and Deutsche Bank for failing to come up with $2bn in exit financing
Banks say debt market conditions have materially changed
M&A OutlookM&A Outlook
M&A to slow in 2008
Private equity buyouts put on hold
Strategic buyers with strong balance sheets in prime position
Mid-market deals under $500m remain strong
Middle Eastern and Asian companies to continue to seek deals in the US and Europe
Thank You!Thank You!
Global Editor
360 Park Avenue SouthNew York, NY 10010
T: (212) 791-4224E: [email protected]
JOSEPH CHANGJOSEPH CHANG