as·si·du·i·ty

In Dec-03 an affiliate of The Blackstone Group announced its intention to make a public tender offer for the acquisition of all the outstanding ordinary shares in German chemical producer Celanese AG at €32.50 per share. With 50,47m fully diluted ordinary shares outstanding (net of 5,47m treasury shares minus 1.15m ESOP shares) this values the equity at €1.64bn. Adding net debt of €387m and €367m in required pre-funding of pension liabilities and deducting non-operating assets like the minority stakes in various non-consolidated joint ventures with €444m book value brings a total consideration for the consolidated subsidiaries of €1.95bn. This implies the following multiples for the year ended 31-Dec-03: 48% of sales (€4.08bn, 2.0x tangible capital turnover), 4.5x EBITDA (€438m – before US$72m in special items *) -, 9.4% margin), 11.0x EBIT (€178m, 4.3% margin).

The offer document provided management projections for 2004. Applying the €1.95bn enterprise value to these projections results in the following multiples: 50% of sales for 2004E (€4.01bn), 5.0x EBITDA for 2004E (€495m), 10.8x EBIT for 2004E (€227m).

Some additional factors are important in judging the valuation of Celanese. Firstly, the company was already in the process of selling its Nylon (by year-end 2003) and Acrylates (in Feb-04) subsidiaries. These units accounted for some 9% of group sales and some 6% of group EBITDA. Secondly, Celanese has significantly under funded pension and post-retirement benefit obligations. The funding shortfall amounted to €1.03bn at 31-Dec-03 (source Celanese 20-F). The $462.5m (€367m) injection in the pension fund reduces the deficit but still leaves a funding gap of €665. Thirdly Celanese carried €478m in deferred tax assets at 31-Dec-03.

Adjusting the projections for the disposal of Nylon and Acrylates, adding €665m in estimated pension and post-retirement deficits, deducting €478m in deferred tax assets and using pro forma indebtedness of €230m results in an enterprise value of €2.06bn and implies the following multiples: 56% of sales for 2004E (€3,664m), 4.4x EBITDA for 2004E (€464m, 12.7% margin), 9.4x EBIT for 2004E (€220m, 6.0% margin).

To put this €2.06bn valuation into perspective: Celanese’s parent prior to its Jul-99 spin-off Hoechst AG paid US$2.87bn when it acquired the company in a public tender offer in 1986.

The €2.87bn aggregate transaction value was to be financed with €2.18bn in debt and  €690m equity from Blackstone funds. This implies a 76/24  debt to equity ratio and a net debt to EBITDA ratio of 4.2x.

On 1-Apr-04 Blackstone announced that a total of 83.6% of all outstanding Celanese shares (excluding treasury shares) had been validly tendered and not withdrawn at the end of the acceptance period. The offer was conditional to 75% acceptance (lowered from 85% on 12-Mar-04), was extended until 19-Apr-04 and closed on 23-April-04 with 41,588,227 shares (84.3%) tendered.

Due to the lower level of acceptance the aggregate transaction value ultimately amounted to US$3.03bn and was financed with a US$608m term loan facility (senior debt 1.4x EBITDA) and US$1,565m in senior subordinated bridge loan facilities (total net debt 5.5x EBITDA), US$200m in mandatorily redeemable preferred shares (provided by Bank of America) and US$650m in cash equity investment from Blackstone affiliates.

The bridge loan and prefs were refinanced in Jun-04 and Jul-04 through the issuance of US$1,225m and €200m in principal amount of senior subordinated notes together with US$47m in available cash and borrowings under a US$350m senior secured floating rate term loan. In Jul-04 a domination and profit and loss transfer agreement was between Celanese and BCP (the buyout vehicle) was approved by the necessary majority of shareholders at an EGM and was planned to become operative on 1-Oct-04. This obliged BCP to offer to acquire all outstanding Celanese shares from the remaining minority shareholders in return for payment of fair cash compensation which had been determined in Jun-03 by Ernst & Young (hired by Celanese) and confirmed by PwC (hired by the District Court of Frankfurt) to be €41.92 (to be precise!), 29% above the price accepted as fair by the Celanese board four months prior. In Feb-05 still approximately 8m shares of Celanese AG were outstanding with minority investors. The stock was traded up to €50.90 during that month.

During Sep-04 US$853m aggregate principal value in senior discount notes were issued raising US$500m net. These proceeds were used to make a return of capital distribution to the Blackstone affiliates and to pay fees and expenses.

In Jan-05 Celanese Corporation (the ultimate holding company of the buyout vehicle) completed a public offering of 50m shares of common stock (31.5% of common stock outstanding after this offering) at US$16 per share for a total gross proceeds of US$800m as well as US$240m worth of convertible preference shares. In conjunction with the offering the company would be recapitalized and a further US$952m dividend to equity investors (that by that time also included funds run managed by Bank of America’s BA Capital Management). This offering valued the equity of the Celanese Corporation at US$2,779m. Including US$2.57bn in pro forma post-offering net debt at 30-Sep-04 (net of US$646m in cash) the total valuation of Celanese amounted to US$5.31bn.

And this is for approximately 85% of the equity of Celanese AG that was acquired nine months prior for €1.64bn/US$1.97bn. In terms of value per Celanese AG share at the Jan-05 €/US$ exchange rate of US$1.32 this amounts to €87 (!!) per Celanese AG share (adjusted for US$383m assumed debt).

The public offering price implied the following multiples for the 12 months ending 30-Sep-04: 109% of sales  (US$4.89bn), 8.3x EBITDA (US$638m – before US$80m in special charges -,  13.0% margin), and 15.8x EBIT (US$335m – also before US$80m in special charges -, 6.9% margin).

On the basis of results for the year ended 31-Dec-04 (reported on 28-Feb-05) the multiples were: 101% of sales, 6.4x adjusted EBITDA (US$801m – before US$329m in unusual, non-recurring and non-cash charges as provided by management),

Calculated using pro forma post-IPO net debt of US$2.43bn, and therefore an enterprise value of US$5.11bn)

*) €94m income from insurance recoveries, €84m in expenses for antitrust matters, €50m expense for stock appreciation rights, and €32m in restructuring charges.