Transcript Chemical Industry Business Trends – Joseph Chang

The State of the
Chemical Industry
+ M&A Outlook
ISM Chemical Group
Mid-Winter Conference
Galveston, Texas
February 27, 2008
JOSEPH CHANG
Global Editor
ICIS Chemical Business
Forecasts from March 2007
Forecasts:
Commodity profits strong,
stocks to rise
Verdict:
Somewhat true
Specialty profits continue
momentum, but cautious
on stocks
True
Attempts to take public
companies private
True
Record year for M&A
On the money!
2007 – 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 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 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 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 Cycle
Source: Probe Economics, Inc.
Why the Peak Never Came in 2003
Many analysts expect the next
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 in
1995.
Our growth, through
construction and acquisition, has been timed to take full advantage of the expected
peak in the earnings cycle.
Source: Nova Chemicals
2003 – 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.”
“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
June 2003
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Nova Chemicals (NCX)
60
50
40
30
Ultra-Bearish
Forecasts
Jun 2003
20
10
0
Source: Yahoo! Finance
Capital Spending as % of Depreciation
Major/Commodity Chemicals
300%
250%
200%
150%
100%
50%
0%
-50%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
-100%
Dow Chemical
DuPont
Source: ICIS Chemical Business
Eastman
Solutia
Nova
Lyondell
1H
2007
Georgia Gulf
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 Dollar
Export 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
Ready to Weather a Storm?
Net Debt
End 2000
Debt/Capital
2000
Net Debt
End 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%
Company
*As of Q3 2007
Source: SEC Filings, ICIS Chemical Business
Predictions 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 Acquisitions
What’s Next After the Credit Crisis?
2007 – A Record Year
bn
Global Chemical M&A
Source: Young & Partners
Mega Deals 2007
Buyer
Akzo Nobel
SABIC
Basell (Access Industries)
Hexion Specialty Chemicals
(Apollo Management)
PPG Industries
Source: ICIS Chemical Business
Target
Price
ICI
$16bn
GE Plastics
$12bn
Lyondell Chemical
$13bn
Huntsman
$6.5bn
SigmaKalon
$3bn
Private Equity Revival
1H 2007
 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
Source: Young & Partners, ICIS Chemical Business
2H 2007: Bonds Shoot Blanks
 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
Debt Offerings – Where Art Thou?
 Rohm and Haas $1bn (Sept 2007)
Investment grade
 SABIC Innovative Plastics $9.2bn (Aug 2007)
Special situation – banks want relationship
with Saudi government
Ticking Time Bomb
 LyondellBasell
Deal completed using $8bn in interim
financing
Financing agreement stipulates that the
interest rate will rise by 0.5% every 3
months, starting in May 2008
 Apollo (Hexion)/Huntsman
Extended 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!
 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 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!
JOSEPH CHANG
Global Editor
360 Park Avenue South
New York, NY 10010
T: (212) 791-4224
E: [email protected]