Blackstone/Celanese Mergers and Acquisitions Valuation Due Diligence Deal Structuring

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FINANCE SIMULATION FOR COURSES IN: PRIVATE EQUITY BLACKSTONE/CELANESE MERGERS AND ACQUISITIONS VALUATION DUE DILIGENCE DEAL STRUCTURING

BY NABIL N. EL-HAGE AND TIMOTHY A. LUEHRMAN HARVARD BUSINESS SCHOOL

hbsp.harvard.edu FINANCE SIMULATION BLACKSTONE/CELANESE

In 2003, The Blackstone Group LP, a private equity firm, considered a friendly takeover of the global chemical manufacturer Celanese AG. If successful, the transaction would be the deal. Students play through three rounds largest European public-to-private acquisition in beginning with an initial valuation of Celanese, history. In this multi-player simulation, students then conduct due diligence, establish deal assume the roles of Blackstone or Celanese and terms, and respond to bids while considering recreate the circumstances of this landmark the interests of other stakeholders.

Finance Simulation Blackstone/Celanese

prepare analyze decide

operating income balance cash due purchase sources & exit value chemical assumptions statement sheet flow diligence price uses of & IRR comparables inputs funds Overview Historical Data Chat Confidential Info

EBITDA Copy to Clipboard 1998 to 2002 2003 2004 2005 2006 2007 2008 700

OPERATING ASSUMPTIONS Sales Growth -8.60% 0.00% 0.50% 1.60% 5.20% 1.30%

COGS as a % of Sales 62.20% 64.00% 65.00% 67.00% 69.00% 69.00% 0 2004 2008 Gross Margin 37.80% 36.00% 35.00% 33.00% 31.00% 31.00%

SG&A as a % of Sales 27.20% 25.30% 25.30% 25.30% 25.30% 25.30% CAPITAL CASH FLOWS

Potential Additional SG&A Reductions -12.0 8.0 -24.0 -24.0 -42.0 400

SG&A as a % of Sales After Reduction 27.20% 24.99% 25.50% 24.70% 24.73% 24.32%

EBITDA Margin 10.60% 11.01% 9.50% 8.30% 6.27% 6.68%

EBIT Margin 0 4.24% 4.75% 3.24% 2.49% 0.53% 1.00% 2004 2008

CapEx 208.0 231.0 230.0 234.0 232.0 233.0

Blackstone Monitoring Fee 5.0 5.0 5.0 5.0 5.0

Additional Special Charges 15.0 17.2 14.3 14.7 16.2

The simulation includes several tools to help students determine the value of Celanese.

Round 1: Determining Value Exclusive Video Students analyze the factors that drive the profitability of Celanese. The simulation includes access to a debrief They determine a value and then set reservation prices. video featuring Anjan Mukherjee, a managing director at Blackstone during the Celanese deal. The simulation includes three valuation models that allow students to explore multiple approaches to valuation for a private equity deal: The LBO Model The Capital Cash Flow Model The Equity Cash Flow Model Customer Service: 24 hours a day, 7 days a week hbsp.harvard.edu/customerservice

Finance Simulation Blackstone/Celanese

prepare analyze decide

operating income balance cash due purchase sources & exit value chemical assumptions statement sheet flow diligence price uses of & IRR comparables inputs funds Chat Confidential Info

2004 2005 2006 2007 2008 Ask Ask Consultant Celanese Consultant response

Extensive analysis Original 0.0% 05% 1.6% 5.2% 1.3% of projected industry capacity utilization rates Sales Growth Projections & the Chemical Cycle and end-use Understanding where Celanese is in the current chemical cycle demand suggests is fundamental to appropriately projecting revenue growth rates. Consultant 0.5% 4.3% 9.0% 2.0% 0.7% € 4.00 the following Thecommodity chemical business is cyclical in nature. million sales growth Read More >> pattern.

Celanese 0.7% 3.5% 0.7% 0.2% 0.0%

Original 61.0% 61.0% 61.0% 61.0% 61.0% Estimation of Changes in COGS COGS as a percentage of sales varied as a result of higher raw material and energy costs and could be partly offset by increased Consultant You have not yet requested this information from the consultant. € 3.00 selling price. Over time. COGS as a percent of sales could be million Read More >> Celanese You have not yet requested this information from Celanese.

POTENTIAL SOURCES OF SG&A REDUCTION

Original 0.0 20.0 -12.0 -12.0 -30.0 Acetate Flake Restructuring In 2003, Celanese was primarily a manufacturer of commodity chemicals; therefore, it did not incur as many marketing and Consultant You have not yet requested this information from the consultant. € 1.00 administrative expenses as a specialty chemicals firm did. SG&A million Read More >> Celanese You have not yet requested this information from Celanese.

Original -2.0 -2.0 -2.0 -2.0 -2.0 Southern Methanol Restructuring Opportunity StudentsIn 2003, Celanese conduct was dueprimarily diligence a manufacturer to gather of commodity information on the valuation of Celanese. chemicals; therefore, it did not incur as many marketing and Consultant You have not yet requested this information from the consultant. € 2.00 administrative expenses as a specialty chemicals firm did. SG&A million Read More >>

Round 2: Conducting Due Diligence and Negotiating Round 3: Getting Approval Students conduct due diligence by gathering and analyzing primary data in an Once an agreement is reached, students seek effort to uncover any significant factors that affect the valuation of Celanese. approval from the stakeholders on each side of Blackstone can request information directly from Celanese and both roles can use the deal. As a private equity firm, Blackstone a limited budget to order reports from outside consultants. Students must decide must get support from the Blackstone which information is most important to obtain for their ongoing analysis. Investment Committee. The banks must approve Blackstone’s financing requirements. In the Blackstone role, students must create a deal that meets the objectives of Other stakeholders include the Celanese the firm’s investment committee, while in the Celanese role, they want to maximize management team, shareholders, and board of value for shareholders and protect the interest of other stakeholders. directors. With so many stakeholders, conflicts of interest are inevitable. If the deal is rejected, Negotiation begins when students in the Blackstone role construct an offer for students must resume negotiation until a acquiring Celanese. Students can negotiate face-to-face or through the chat suitable agreement can be reached. capability in the simulation.

Price is just one of three issues in an offer that students must consider: Share price Management stock option pool for Celanese management Supplemental cash contribution to the underfunded pension plan ALSO AVAILABLE Finance Simulation: M&A in Wine Country V2 Students continue negotiation, making offers and counteroffers, until an offer is By Timothy A. Luehrman and W. Carl Kester accepted or until the students in the Blackstone role end negotiation. PRODUCT #4805

Administration tools on next page FINANCE SIMULATION Customer Service: 24 hours a day, 7 days a week BLACKSTONE/CELANESE hbsp.harvard.edu/customerservice

Administration Options Finance Simulation Blackstone/Celanese and Tools class summary team results scenario setup team results zopa reservation completed final deal price deal price due summary prices deal prices Blackstone vs. stock vs. pension diligence A comprehensive Facilitator’s Guide IRR options pool prefunding covers key learning objectives, including: Due Diligence 15 13 13 13 13 Understanding how private equity firms 14 14 14 14 14 14 14 12 14 14 14 12

9 create value in a leveraged buyout (LBO) 9 8 Comparing valuation methods: Capital Cash 6 3

Flows, Equity Cash Flows, and LBO Models 0 0 Sales Growth COGS Percent Acetate Flake Southern HQ CAPEX Frankfurt Asbestos OXO Antitrust Conducting due diligence in LBO and M&A Methanol Consolidation Airport Liability

transactions Item Hired by Blackstone Hired by Celanese Total FacultySales Growth can review different team strategies14 in selecting due 14 diligence items.28 COGS Percent 14 14 24 Uncovering conflicts of interest among Acetate Flake 14 14 28 Southern Methanol 9 14 23 stakeholders HQ Consolidation 12 0 12 CAPEX 14 14 28 Frankfurt Airport 13 13 26 Evaluating return expectations FinanceAsbestos SimulationLiability Blackstone/Celanese 13 8 21 OXO Antitrust 14 13 27 class summary team results scenario setup Understanding the negotiation process game details Results are available for immediate debrief Select a Team Team 4 76 Bid History Celanese at the conclusion of the simulation. Faculty Blackstone Reservation Price: 31.00 Celanese Reservation Price: 45.20 can review class summary results as well as • The Blackstone Group agreed to acquire Celanese for €36.00 per share Celanese • Celanese has accepted Blackstone’s offer of €36.00 per share. 4:26:26 PM Reservation Price: €45.20 detailed results for individual teams including • Blackstone made an offer to Celanese . 16:26:05 Offer Price €36.00 per share Stock options 11.00% bid histories. Dynamic charts allow for Supplemental Pension Contribution 400.0 Final Offer: €36.00 comparison of outcomes including a review • Celanese rejected Blackstone’s offer of €35.00 per share. 4:13:42 PM • Blackstone made an offer to Celanese. 16:11:39 of the zone of possible agreement (ZOPA) Offer Price €35.00 per share Stock options 11.00% Supplemental Blackstone based on reservation prices set at the start Pension Contribution 400.0 Reservation Price: €31.00 • Celanese rejected Blackstone’s offer of €35.00 per share. 4:03:23 PM Blackstone of the simulation. We believe this offer is insignificant. It may be higher than the of our company. We do not believe that it is our shareholders’… 0

• Blackstone made an offer to Celanese . 16:01:00 Offer Price €35.00 per share Stock options 10.00% Supplemental GraphsPension showContribution the2.0 “zone of possible agreement” and completed deals. PRODUCT #3712 • Celanese rejected Blackstone’s offer of €29.12 per share . 3:28:24 PM

• Blackstone made an offer to Celanese . 15:27:22 Offer Price €29.12 per share Multi-player: 2 Roles Stock options 8.00% Seat Time: At least 120 minutes

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