The State of the 

Chemical Industry 

+ M&A Outlook

The State of the 

Chemical Industry 

+ M&A Outlook

ISM Chemical Group

Mid-Winter Conference

ISM Chemical Group

Mid-Winter Conference

JOSEPH CHANG

Global Editor

ICIS Chemical Business

Mid-Winter Conference

Galveston, Texas

February 27, 2008

Mid-Winter Conference

Galveston, Texas

February 27, 2008
Forecasts from March 2007

Forecasts: Verdict:

Commodity profits strong, 

stocks to rise Somewhat true

Specialty profits continue 

True

True

Specialty profits continue 

momentum, but cautious 

on stocks

Attempts to take public 

companies private

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 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

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.

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 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 

“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 

“The US is the highest cost 

ethylene producing region 

in the world at current 

natural gas price levels. 

enough to enjoy a favorable oil Directionally, we expect the 

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

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

Directionally, we expect the 

North American 

petrochemicals industry to 

become a high-cost 

globally uncompetitive 

producer serving a large 

local market.”

June 2003
40

50

60

Ultra-Bearish 

Nova Chemicals (NCX)

0

10

20

30

Jan-03Mar-03

May-03

Jul-03

Sep-03

Nov-03

Jan-04Mar-04

May-04

Jul-04

Sep-04

Nov-04

Jan-05Mar-05

May-05

Jul-05

Sep-05

Source: Yahoo! Finance

Ultra-Bearish 

Forecasts

Jun 2003
Capital Spending as % of Depreciation

Major/Commodity Chemicals

150%

200%

250%

300%

Source: ICIS Chemical Business

-100%

-50%

0%

50%

100%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 1H

2007

Dow Chemical DuPont Eastman Solutia Nova Lyondell Georgia Gulf
Why a Crushing Downturn is Unlikely

 North American producers have vowed 

never to build new local capacity 

 High natural gas prices natural gas prices – no reason 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
Company Net Debt

End 2000

Debt/Capital

2000

Net Debt

End 2007

Debt/Capital 

2007

Dow $6.2bn 40% $8.0bn 29%

Ready to Weather a Storm?

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%

*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

Global Chemical M&A

Source: Young & Partners bn
Mega Deals 2007

Buyer Target Price

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

Private Equity Revival

1H 2007

 High leverage with low rate, covenant-lite debt

 Banks and debt holders take the big risk

Source: Young & Partners, ICIS Chemical Business
 Credit crisis has slammed the 

brakes on mega deals

2H 2007: Bonds Shoot Blanks

 Credit markets recovering, but very 

slowly in the high yield market

 All quiet on the bond front
 Rohm and Haas $1bn (Sept 2007)

Investment grade

 SABIC Innovative Plastics $9.2bn (Aug 2007)

Debt Offerings – Where Art Thou?

 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!

Global Editor

JOSEPH CHANG

360 Park Avenue South

New York, NY 10010

T: (212) 791-4224

E: joseph.chang@icis.com