# The State of the

Chemical Industry + M&A Outlook The State of the Chemical Industry + M&A Outlook ISM Chemical Group Mid -Wi nter Conference ISM Chemical Group Mid -Wi nter Conference JOSEPH CHANG Global Editor ICIS Chemical Business 

### Mid -Wi nter Conference Galveston, Texas February 27, 2008 

### Mid -Wi nter Conference Galveston, Texas February 27, 2008

# Forecasts from March 2007 Ve rdict: Forecasts: Commodity

profits strong, stocks to rise Somew hat true Specialty

profits continue Tr ue Tr ue Specialty

profits continue momentum, but cautious on stocks Attempts to take public companies private On the money ! Record ye ar for M&A

# 2007 – A Tale of Two Halves 1H 2007  US economy started out strong  Supply/demand fundamentals favorable in chemicals  M&A a ctivity 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 DowC hemical $0.84 - 14% Nova $1.12 +955% Eastman $ 1.27 +1 1% Celanese $ 0.93 +52% FMC $0.59 -3% DuPont $0.57 +27% Rohm and Haas $ 0.91 +1 1% Hercules $ 0.31 +35% Al bemarle $ 0.60 -8%
Sour ce: Y ahoo! Finance

# Wall Street Outlook
E2008 % Change Stock price* P/E** DowC hemical $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 Celanese 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 Al bemarle $2.75 +15% $40.15 14.6x Sour ce: Y ahoo! Finance *Prices as of close of 2/20/08 ** Based on estimated 2008 EPS

# US Petrochemical Cycle

Sour ce: Pr obe 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 poly mer 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.

Sour ce: Nova Chemicals

# 2003 – A Peak in Pessimism “In the previous ethy lene trough of 1991 to 1992 and the peak of 1995 to 1996, US chemicals have been fortunate enough to enjoy

afavorable oil “In the previous ethy lene trough of 1991 to 1992 and the peak of 1995 to 1996, US chemicals have been fortunate enough to enjoy

afavorable oil “The US is the highest cost

ethy lene producing region in the w orld at current natural gas price levels. Directionally

, w e expect the enough to enjoy

afavorable oil to natural gas price ratio. Those lucky

d ays seem to have gone. Higher ethy lene feedstocks could mean that cash margins at the next cyclical peak are low er than in previous peaks.” June 2003 enough to enjoy

afavorable oil to natural gas price ratio. Those lucky

d ays seem to have gone. Higher ethy lene feedstocks could mean that cash margins at the next cyclical peak are low er than in previous peaks.” June 2003 Directionally , w e expect the North American petrochemicals industry t o become a high -cost globally u ncompetitive producer serving a large local market.” June 200340

50 60

Ultra - Bearish 

# Nova Chemicals (NCX)

0 10 20 30 Jan -0 3 Ma r- 03 Ma y- 03 Jul -0 3 Se p- 03 No v- 03 Jan -0 4 Ma r- 04 Ma y- 04 Jul -0 4 Se p- 04 No v- 04 Jan -0 5 Ma r- 05 Ma y- 05 Jul -0 5 Se p- 05 Sour ce: Y ahoo! Finance Ultra - Bearish Forecasts Jun 2003

# Capital Spending as % of Depreciation

Major/Commodity Chemicals

150% 200% 250% 300%

Sour ce: ICIS Chemical Business -1 00% -5 0% 0% 50% 100%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 1H 2007 Dow Che mic al DuPont Ea st man Sol ut ia Nova Lyondel l Ge orgi a Gu lf

# Why a Crushing Downturn is Unlikely

 North American producers have vowed never to build new local capacity  High natural gas prices – no reason to natural gas prices no reason build  Strong balance sheets  We ak 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 $19.2bnCompany 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 Sour ce: 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 Y ear Global Chemical M&A

Sour ce: Y oung &Partnersbn

# Mega Deals 2007 Buyer Ta rget 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

Sour ce: 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

Sour ce: Y oung &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 NewY ork, NY 10010 T: (212) 791 -4224 E: joseph.chang@icis.com