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  • Internal Code :
  • Subject Code : AC6108
  • University :
  • Subject Name : Accounting and Finance

Venture Capital and Private Equity

Introduction to Celanese AG

Celanese AG is a global technology and specialty material company. It is headquartered in Komberg, Germany. Currently, company is operating in a rather difficult environment which is due to cyclical nature of its business. Demand and supply of commodity chemical business has witnessed a cyclical behavior of late. This has had a huge impact on the end users market due to profound impact on the demand and product pricing. In the financial year (FY) 2003, Blackstone was contemplating the takeover bid for Celanese AG. It looked at this as an opportunity to expand into new horizons and was evaluating the potential acquisition of the company. To negotiate with the board members of the Celanese AG, the delegation of Blackstone had met with their counterparts in March 2002. They had firm believe that this would increase the valuation of the Blackstone. The next sections of the report will explain the discussion in three rounds and the different methodologies for valuations used by the Blackstone in evaluating Celanese. In addition, the detail reports on the outcome of the meeting and how the acquisition went through is discussed in detail in the next sections.

Valuation of Celanese

Being a leading manufacturing company, Celanese behave very much, the way market demand moves. Based on the figures presented in excel, company is not expected to grow consistently, because it highly correlated with economic fluctuations and fluctuated demand for its core products. The future projections will be based on price changes witnessed in its core commodities chemical units. Despite, the evidence that there exist the imbalances in the demand and supply of its core chemical products, it is assumed here that company is expected to show the multi-stage growth. The economy is projected to grow exceptionally in FY 2008 and there is estimated increase in the high demand and growth in the sales of its products.

Here, company’s historic data is used to predict the behavior of the sale growth in the future years. Based on the assumptions at the company’s model, it is predicted that growth rate will be 1.30 %. It is important to understand that the position of Celanese in the current chemical cycle is fundamental in order to appropriately project the revenue growth rates of the company. Basically the commodity chemical business has a nature that is cyclical. The manufacturing, housing, agricultural and automobile sectors are the largest markets for chemical producers and since these businesses are cyclical in nature, the overall commodity chemical industry is also very highly cyclical.

The fall in demand results in excess supply, therefore the chemical producers have to reduce selling prices. With lower prices that are combined with lower volumes results in facilitating operations at losses. It can further result in reduction of capacity over time and can bring the demand and supply situation back in line. In addition to the cyclical nature of the business of Celanese, there are imbalances in demand and supply caused by capacity additions which result in large swing in price. In the case of new supply, as a manufacturer of chemical, it will attempt to sell its new supply while other producers try to maintain the prevailing volume. As a result, all manufacturers have to reduce their selling prices in order to maintain and make customers.

As economy grows and new application increases the demand, then excess capacity can be used up. Eventually demand and supply balances and the manufacturers can then maintain or even increase prices. In case of rising demand results in higher prices and tight capacity, the manufacturers can add new capacity. This cycle will continue to repeat over time.

For Celanese, the growth projections about sales are based on fundamental assumptions related to price and volume changes in core commodity units of chemicals. These price and volume changes are driven by total capacity utilization rates.

However, the COGS as a percentage of sales were 61 % in FY 2003 but were constant in remaining year up to FY 2008. Similar to this trend, the figures for SG&A as % of sales have also depicted the same trend as COGS figures.

A leveraged buyout (aka LBO) can be considered to be an acquisition performed by a financial sponsor. It is generally financed using large amounts of debt and leverage is used for increasing returns for equity holding entities. The debt is repaid from the operational cash flows of the company. The private equity funds are expected to exit their investment in medium term in order to monetize the returns that have been generated. LBO transaction are measured by calculating IRR (an internal rate of return). It compares the equity investment upon exit as compared to the amount invested at entry level, it calculates an return on the investment on annual basis.

In order to perform an LBO valuation, the following is required (as a minimum):

  • In order to forecast EBIT and EBITDA, an operating model has been created in excel using the simulation data provides
  • Forecasting of future debt is also very essential in order to know how debt values develop from date of acquisition to exit date.
  • Assumption about EBITDA multiple in order to determine the level at which LBO investor can exit
  • Assumption about the amount of debt, the buyer (Blackstone) will be able to raise in order to fund the purchase transactions

The operating model to calculate ABITDA, EBIT and EAT is shown in below table:-

Income Statement

2003

2004

2005

2006

2007

2008

Sales

3927.8

3927.8

3947.4

4010.6

4219.1

4274

Expenses

3511.5

3377.6

3414.6

3437.2

3617.1

3646.4

EBITDA

416.3

550.2

532.8

573.4

602

627.6

Depreciation

249.8

245.9

247.1

233

242.2

242.8

EBIT (Reportable per GAAP)

203.5

644.7

294

357.7

394.9

394.5

Total Net Interest Expense

0

213.5

210.2

211.6

212

210.7

Pre Tax Income

203.5

431.2

83.8

146.1

183

183.8

Income Taxes

0

279.4

49.7

68.2

86.9

82.7

EAT

233.5

183.7

63.8

118.4

138.2

143.2

Additionally, the entry multiple is assumed to be 7.9 times and the total enterprise value as given in the simulation is 2018.4. For the entry level the following data has been gathered for the model and based on the collected information the value of capital expenditure has been calculated:-

Particulars

Amount

%

Equity

1493.4

74%

Debt

525

26%

Total

2018.4

 

EBITDA - Capex

208.3

 

Capex

208

 

 

Free cash flow

2003

2004

2005

2006

2007

2008

EAT

 

183.7

63.8

118.4

138.2

143.2

Add: Depreciation

 

245.9

247.1

233

242.2

242.8

Less Capex

 

231

230

234

232

233

Less Increase in WC

 

-0.4

3.6

11.6

38.2

10

 Cash Dividends Received from Subs

 

21.4

19.9

27.1

28.2

28.2

 Increase in Net 'Other Assets'

 

48.2

25

11

12

12

FCF

 

172.2

72.2

121.9

126.4

159.2

Based on EAT, the free cash flow has been calculated as follows

For the ending year the exit multiple is considered to be 7.9 times and as forecasted in the above tables, the EBITDA for the financial year 2008 remains 627.6. Therefore the ending TEV has been calculated by multiplying the multiple with the ending EBITDA to get a value of 4958. The ending debt figure has been calculated as follows:-

Ending TEV

4958.04

Beginning Debt

525

Less: Cash Generated (total of FCF from 2004 to 2008)

651.9

= Ending Debt

-126.9

IRR can be calculated as follows:-

A. Ending Equity Value (Ending TEV – Ending Debt)

5084.94

B. Beginning Equity Value

1493.4

EV multiple (A / B)

3.40

The IRR has been determined based on the following approximation:-

Approximation

 

2.5*

20%

3.0*

25%

3.5*

30%

IRR = 29 %

IRR implied entry equity valuation = Ending equity value / (1 + IRR)n

94 / (1 + 0.27)5

66

Available Debt Financing Entry = 525

IRR implied enterprise value (Max EV) = A + B

66

Exit Debt = -126.9

Target's implied equity purchase price = C – D

6

Importance of BATNA and ZOPA in Deal Negotiations

BATNA stands for Best Alternative to a Negotiated Agreement. It can be defined as the most advantageous alternate plan that either of the negotiating party can employ in case of negotiation talks are going out of control or seems to fail due to which an agreement was not able to be made. In other words, the BATNA of a party is its alternative when negotiations remain unsuccessful and can make the deal happen to party’s advantage. Every successful business deal prepares and keeps a backup plan; preparation of BATNA is such a backup plan and thus is very important.

Importance of BATNA

BATNA is often used in negotiation tactics and should always be considered before a negotiation takes place. It is never wise to enter into a serious negotiation without knowing your BATNA. The value of knowing your best alternative to a negotiated agreement is that:

  • It provides an alternative if negotiations fall through.
  • It provides negotiating power.
  • It determines your reservation point (the worst price you are willing to accept).

The current (2003) trading price per share of Celanese remains 28.66 where the total number the outstanding share remains 52.1 which results in the total equity value of 1493.4. The existing debt of the company is 525, hence the Purchase Total Enterprise Value (TEV) for Celanese becomes 2018.4. The target's implied equity purchase price as per the valuation made by Blackstone is going to be 2606.6 which is a reasonable offer higher than the total enterprise value of the company. However considering the pension fund which amounts 878, the negotiations has to make some additional efforts from the side of Blackstone.

ZOPA (aka the zone of possible agreement) can be defined as a range of bargaining. It can be considered as an area where negotiating parties (two or more) may find some common level. It is this particular area or zone in which the parties generally compromise in the negotiation process and strike the deal. For finding a settlement level or to reach to a mutual agreement by the negotiating parties, they are required to work for a common goal and identify an area that incorporates some ideas of each party.

The zone of possible agreement can only be viable if in case of some overlap exists amongst all the parties and their demands and willingness to accept from the deal. In this case Celanese’s EV is 2018.4 and that is the minimum price that it can ask Blackstone while negotiation takes place. The Blackstone must be willing to pay at least the minimum value. But as per Blackstone’s valuation of the company, it can offer 2606.6 against acquisition, hence there is an overlap exists between bottom lines of both parties. It can be also said that the parties are in the positive bargain zone and the deal could be completed.

Reference for Financial Valuation

Cook, C., Frisch, S., & Novak, V. (2019). Recent Developments in EU Merger Remedies (2018). Journal of European Competition Law & Practice10(6), 394-410.

O'daly, C., & Pozo, V. D. (2019). A Review of 2018 Eu Merger Control. Competition Law & Policy Debate5(1), 4-22.

Riahi-Belkaoui, A. (2019). The substitution of net value added for earnings in equity valuation. Available at SSRN 3333409.

Anesten, S., Möller, N., Skogsvik, K., & Skogsvik, S. (2020). The pricing accuracy of alternative equity valuation models: Scandinavian evidence. Journal of International Financial Management & Accounting31(1), 5-34.

Pinkley, R. L., Conlon, D. E., Sawyer, J. E., Sleesman, D. J., Vandewalle, D., & Kuenzi, M. (2017). Unpacking BATNA availability: How probability can impact power in negotiation. In Academy of Management Proceedings (Vol. 2017, No. 1, p. 16888). Briarcliff Manor, NY 10510: Academy of Management.

Betina, S. I., Harrat, A., & Petit, D. (2017). Analysis grasshopper diversity and associated factors involved in grasshopper diversity in arid Aurès mountains (Batna, Algeria).

Santos, V. P., Gomes, A., Gasparello, I., Vilela, P. A., Zopa, A. L. V., Lucas, S. R. R., ... & Angelo, B. J. (2017). Experiência de médicos-veterinários residentes e aprimorandos atuando com equipe multiprofissional em ações de educação em saúde e atenção primária. Revista de Educação Continuada em Medicina Veterinária e Zootecnia do CRMV-SP15(1), 70-70.

Sukmaningsih, D. W. (2018). A model for lender-borrower trust in peer-to-peer lending. ComTech: Computer, Mathematics and Engineering Applications9(1), 15-24.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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