WOULD REACH ENHANCE MERGERS & ACQUISITIONS?

CEFIC Laegis Workshop Brussels November 30th 2006Jacques LEHRE – Rhodia

Françoise LABROUSSE – Jones Day

PAI 445250

Table of Contents

• What are the potential business impacts of REACH?

• How can M&A be impacted by REACH?

• How will the M&A process be impacted by REACH?

• Conclusion

• Annex : REACH due diligence questions

WHAT ARE THE POTENTIAL BUSINESS IMPACTS OF REACH?

Additional administrative costs: even if a "sharing principle" has been enacted by the EU, REACH will mean significant registration costs

These costs have to be justified vs size and profitability of the product lines concerned

Public information on hazards: a clear benefit of REACH in a sustainable development context, yet changes in labelling or information made public on the Internet could alter downstream user's or final customer's attitude

Medium or long term commercial position could be impacted

Restrictions or prohibitions: implementation of REACH could potentially lead to a ban of certain hazardous products

Product lines would have to be stopped or substitutes found

HOW CAN M&A BE IMPACTED BY REACH?

REACH could trigger further concentration of business lines: producers and importers having limited market shares may decide to exit and focus their REACH efforts on their core businesses

This would mean additional small to medium size transactions (mostly intra-European, but non-EU countries could take advantage of this situation to get to key technologies)

REACH could trigger further off-shoring: some non EU countries, already attractive because of their production costs, may be seen as even more interesting if they have lesser administrative requests on hazardous products

New production capacities can either be built from scratch or acquired

Open question : can REACH impact value of public companies?: publicly traded companies could suffer from the media coverage of REACH when it comes into force (link between chemicals and risks to human health)

Private equity funds could take advantage of drop in share value

1 – Before REACH is in force or fully clarified (year 2007)

Buyers will be in an awkward situation: they cannot ask for clear information or warranties by Sellers (because Sellers will not know), still they cannot ignore the potential impacts of REACH This uncertainty could drive purchase prices down

It will be the best moment for Sellers to exit: the earlier the better for a company that has a REACH impacted business to divest, waiting means potentially selling at the same time as all the others with a similar problem Dilemma: selling faster may mean selling cheaper (because of

uncertainty, see above)

Ideal is for Buyers already active in the concerned business line: they will have the registration fees anyway and they can get a good price (see above) These Buyers could be pro-active (suggest exit to concerned companies)

HOW WILL THE M&A PROCESS BE IMPACTED BY REACH (1/3)?

2 – When REACH is in force and first implementation under way (year 2008-2018 depending on product volumes)

Sellers will have to provide information about the registration processes: Buyers will want to see appropriate documentation in the data room One specific point: Buyer and Seller could be part of the same consortium as far as

registration is concerned (this would make things easier)

Uncertainty is lower than before but still exists: Costs of registration will be better known but in specific cases where restrictions or authorizations are possible, final decision of EU agency may take months Concluding a transaction in the middle of the REACH process may be difficult in the

cases when restrictions or authorizations are expected. Buyers will want to wait for the agency final decision

This period may be the worst for M&A: Urge of companies to exit "difficult products" will be at its highest (because REACH will be in its launching phase) while feasibility of transactions will be at its lowest (because REACH is a long process, time limit of authorization could be 5 years)

HOW WILL THE M&A PROCESS BE IMPACTED BY REACH (2/3)?

HOW WILL THE M&A PROCESS BE IMPACTED BY REACH (3/3)?

3 – After first implementation of REACH(2010-2118 depending on product volumes)

REACH will be just another administrative document to produce: First thing Buyers will ask is obviously full REACH registration for all the products of the target REACH registration documents will be placed in data room

The European dimension of REACH could then be a plus:The registration will cover all EU countries, reducing the need to investigate on a country by country basis in multi-country deals

CONCLUSION

REACH is surely a painful process to go through and an additional complexity to M&A deals in the immediate future,

yet REACH could be a facilitator to the transactions involving hazardous products once the companies are done with their registrations.

Annex: REACH due diligence questions

A. Before the Entry Into Force of REACH 1) How is the Target impacted by REACH?

Are the products manufactured or imported by the Target subject to REACH ?

• Scope of REACH: all substances whether manufactured imported or used as intermediates or placed on the market, either on their own, in preparations or in articles

• Exemptions: radioactive, subject to customs supervision, non isolated intermediates, waste

• Out of the scope: food, water, minerals, etc.

If the Target’s substances fall within the scope of REACH, what legal regime the Target must follow for each of the substances produced or imported ?

• Registration

• Authorisation

What is the role of the Target under REACH?

• Manufacturer, Importer, or Downstream User

2) Depending on the substances and the role of the Target, what measures need to be taken in order to achieve compliance with REACH?

Register substances

• Submit a technical dossier, for substance in quantities of 1 tonnes and more, and

• Submit a chemical safety report, for substances in quantities of 10 tonnes or more.

If it is considered necessary by the authorities for certain substances, implement restrictions or request an authorisation.

3) Depending on the substances, when is the deadline to be compliant with REACH obligations?

Registration:

• Phase-in substances (Substances listed in the European Inventory of Existing Chemical Substances, or that have been manufactured in the Community, but not placed on the Community market, in the last 15 years or the so-called “no longer polymers” of Directive 67/548): pre-registration required between 12 and 18 months after the entry into force of REACH

• Non-phase-in-substances (substances not produced or marketed prior to the entry into force of REACH): within 3 years after the entry into force of REACH for substances of high concern and substances produced or imported over 1000 tonnes, within 6 years after the entry into force of REACH for substances produced or imported between 100 and 1000 tonnes, and within 11 years after the entry into force of REACH for substances produced or imported between 1 and 100 tonnes

Authorisation: application must be submitted 18 months before the “sunset date(s)” (the date(s) from when the substance is placed on the market and the use of the substance is prohibited unless an authorisation is granted)

4) What steps have been taken with respect to other Producers/Importers in order to share data/reduce costs and to prepare a joint submission? Have any agreements been negotiated with other Producers/Importers? Have any financial agreement been agreed with other Producers/Importers for sharing registration/authorisation costs?

Registration

• Lead registrant submits the information on the hazardous properties of the substance and its classification

• Other joint registrants submit their company details and their production volume

• However, possibility to opt out of this scheme.

• Joint submission is an option regarding the Chemical Safety Report

Authorisation: possibility to apply for an authorisation alone or in a group of Manufacturers/Importers/Downstream users

5) If Target is a Downstream User, what should be specifically done?

Has appropriate risk management measures been implemented in compliance with REACH?

Has the Downstream User taken appropriate steps to ensure that its uses of substances subject to REACH will be adequately registered/authorized?

Have contractual documents been reviewed/updated to take into account REACH obligations (including between the Downstream User and its suppliers and clients)?

6) Has the Target taken the necessary steps in order to be compliant in a timely manner? Have the financial cost of compliance with REACH been evaluated and reserved?

Financial costs for achieving compliance Financial costs resulting from potential restrictions and ban of certain

substances

B. After the Adoption of REACH and during the Period of its Entry into Force

1) Has the portfolio of substances produced or imported by the Target been analysed to assess whether it is subject to REACH or not?

2) Have the substances been pre-registered or registered or are they in the process of being pre-registered or registered?

3) Could the substances produced or imported by the Target be subject to the authorisation procedure?

Are the substances on the candidate list? If so, there is a risk that an authorisation may be required in the future;

If the substance is subject to an authorization, did the Target take the necessary steps to apply for an authorisation (alone or jointly)?• What is the deadline for obtaining the authorisation?

4) What are the risks if the Target is not in compliance with REACH obligations within the deadline?

Substance is not allowed to be manufactured or imported Sanctions by Member States

C. After all REACH obligations have entered into force

1) Review ongoing compliance of the Target with REACH obligations:

If there is an authorised substance in the portfolio of the Target, when has the authorization been granted?

What is the duration of this authorisation?

Will there be a need to apply for a renewal/other authorisation in the future?

2) Have adequate measures been taken in order to obtain registration/authorization for new substances?