Finance Simulation For courses in: Private Equity Mergers and Acquisitions blackstone/ Valuation Due Diligence celanese Deal Structuring

by Nabil N. El-Hage and Timothy A. Luehrman Harvard Business School Finance Simulation: Blackstone/Celanese

In 2003, The Blackstone Group LP, a private the roles of Blackstone or Celanese and recreate equity firm, considered a friendly takeover of the circumstances of this landmark deal. Students the global chemical manufacturer Celanese AG. play through three rounds beginning with an initial If successful, the transaction would be the largest valuation of Celanese, then conduct due diligence, European public-to-private acquisition in history. establish deal terms, and respond to bids while In this multi-player simulation, students assume considering 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 The simulation includes three valuation Students analyze the factors that models that allow students to drive the profitability of Celanese. explore multiple approaches to They determine a value and then valuation for a private equity deal: set reservation prices. ■■ The LBO Model

■■ The Capital Cash Flow Model

■■ The Equity Cash Flow Model

hbsp.harvard.edu 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 The commodity 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, conduct Celanese wasdue primarily 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 Negotiation begins when students round 3: Getting approval diligence and negotiating in the Blackstone role construct an Once an agreement is reached, Students conduct due diligence by offer for acquiring Celanese. Students students seek approval from the gathering and analyzing primary data can negotiate face-to-face or through stakeholders on each side of the deal. in an effort to uncover any significant the chat capability in the simulation. As a private equity firm, Blackstone factors that affect the valuation of must get support from the Blackstone Price is just one of three issues in an Celanese. Blackstone can request Investment Committee. The banks offer that students must consider: information directly from Celanese must approve Blackstone’s financing and both roles can use a limited ■■ Share price requirements. Other stakeholders budget to order reports from outside include the Celanese management ■■ Management stock option pool consultants. Students must decide team, shareholders, and board of for Celanese management which information is most important directors. With so many stakeholders, to obtain for their ongoing analysis. ■■ Supplemental cash contribution conflicts of interest are inevitable. If to the underfunded pension plan the deal is rejected, students must In the Blackstone role, students must resume negotiation until a suitable create a deal that meets the objectives Students continue negotiation, making agreement can be reached. of the firm’s investment committee, offers and counteroffers, until an offer while in the Celanese role, they want is accepted or until the students in to maximize value for shareholders the Blackstone role end negotiation. and protect the interest of other stakeholders.

Exclusive Video: The simulation includes access to a debrief video featuring Anjan Mukherjee, a managing director at Blackstone during the Celanese deal. administration tools on next page ➜ Administration Tools for Faculty

A comprehensive Facilitator’s Finance Simulation Blackstone/Celanese Guide covers key learning objectives, class summary team results scenario setup including: team results zopa reservation completed final deal price deal price due summary prices deal prices Blackstone vs. stock vs. pension diligence IRR options pool prefunding ■■ Understanding how private equity

firms create value in a leveraged Due Diligence 15 13 13 13 13 buyout (LBO) 14 14 14 14 14 14 14 12 14 14 14 12

9 ■■ Comparing valuation methods: 9 8 Capital Cash Flows, Equity Cash 6 Flows, and LBO Models 3 0 0 Sales Growth COGS Percent Acetate Flake Southern HQ CAPEX Frankfurt Asbestos OXO Antitrust ■■ Conducting due diligence in Methanol Consolidation Airport Liability LBO and M&A transactions Item Hired by Blackstone Hired by Celanese Total FacultySales Growthcan review different team strategies14 in selecting due diligence14 items. 28 ■■ Uncovering conflicts of interest COGS Percent 14 14 24 Acetate Flake 14 14 28 among stakeholders Southern Methanol 9 14 23 HQ Consolidation 12 0 12 CAPEX 14 14 28 ■■ Evaluating return expectations Frankfurt Airport 13 13 26 FinanceAsbestos Simulation Liability Blackstone/Celanese 13 8 21

OXOclass Antitrust summary team results scenario setup 14 13 27 ■■ Understanding the negotiation game process details Select a Team Team 4 76

Bid History Celanese

Blackstone Reservation Price: 31.00 Results are available for immediate Celanese Reservation Price: 45.20 • The Blackstone Group agreed to acquire Celanese for €36.00 per share

Celanese debrief at the conclusion of the • Celanese has accepted Blackstone’s offer of €36.00 per share. 4:26:26 PM Reservation Price: €45.20 • Blackstone made an offer to Celanese . 16:26:05 simulation. Faculty can review class Offer Price €36.00 per share Stock options 11.00% Supplemental summary results as well as detailed Pension Contribution 400.0 Final Offer: €36.00 • Celanese rejected Blackstone’s offer of €35.00 per share. 4:13:42 PM results for individual teams including • Blackstone made an offer to Celanese. 16:11:39 Offer Price €35.00 per share Stock options 11.00% bid histories. Dynamic charts allow for Supplemental Blackstone Pension Contribution 400.0 Reservation Price: €31.00 • Celanese rejected Blackstone’s offer of €35.00 per share. 4:03:23 PM comparison of outcomes including a Blackstone We believe this offer is insignificant. It may be higher than the review of the zone of possible agree- 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 ment (ZOPA) based on reservation Stock options 10.00% Supplemental prices set at the start of the simulation. GraphsPension show Contribution the 2.0“zone of possible agreement” and completed deals. • 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 Stock options 8.00% Printed on recycled paper. Product #M12977 MC161300710 Product #M12977 Printed on recycled paper. Product #3712 | Multi-player: 2 roles | Seat Time: at least 120 minutes | Developed in partnership with Forio Business Simulations

also available Preview and Free Trial Access M&A in Wine Country Visit hbsp.harvard.edu Finance Simulation: By Timothy A. Luehrman and W. Carl Kester Students play the roles of the management team A Preview of the simulation is available Premium Educator access is a free at one of three wine producers. They must service for faculty at degree-granting on our web site at hbsp.harvard.edu. determine the reservation prices, value targets, institutions and allows access to and negotiate deal terms before deciding to A Free Trial allows full access to the Educator Copies, Teaching Notes, accept or reject final offers. This team-based entire simulation and is available to Free Trials, course planning tools, simulation teaches core principles of valuation, Premium Educators on our web site. and special student pricing. M & A strategy, and negotiation. #3289

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