SIMULATION FOREGROUND READING1

The Blackstone Bid for Celanese AG

In late summer 2003, The Blackstone Group LP was contemplating whether to launch a tender
offer for Celanese AGs common shares as a means of effecting a friendly takeover. Blackstone
neededtoformulatespecifictermsofanoffer.Thetransaction,ifsuccessful,wouldconstitutethe
largestEuropeanpublictoprivatetransactioninhistory.

TheBlackstoneGroupLPin2003

The Blackstone Group LP (Blackstone) was a private equity firm founded in 1985 by industry
veterans Peter Peterson, its chairman, and Stephen Schwarzman, its CEO. The firm managed
private equity funds, hedge funds, and other investment funds; invested in real estate and
corporate debt instruments; and provided mergers and acquisitions (M&A) and restructuring
advicetocorporateclients.Itsalternativeassetmanagementbusinessesincludedthemanagement
of corporate private equity funds, real estate funds, hedge funds, funds of hedge funds,
mezzaninefunds,seniordebtvehicles,andclosedendmutualfunds.

Likeothermajorprivateequityfirms,Blackstonein2003wasprivatelyheldandreleasedlimited
informationaboutitsoperations.Sinceitsfounding,Blackstonehadraisedmorethan$25billion
foralternativeassetinvesting,includingmorethan$14billionforprivateequityinvestments.At
$6.5billion,thefirmsBlackstoneCapitalPartnersIVwasthelargestinstitutionalprivateequity
fundeverraised.

1 Sources used in the development of this reading include: Blackstone Press Releases and Celanese Corporate History from
company websites; Hoovers Company Profile of Blackstone; Celanese AG 6-K SEC Filing (October 30, 2003); Celanese AG 13-
E3 SEC Filing (September 2, 2004); Celanese AG 20-F SEC Filings (December 31, 2003 and September 30, 2004); Standard &
Poors Industry Surveys, Chemicals: Basic (January 1, 2004); Commerzbank Securities Analyst Report, Celanese (October 22,
2003); Credit Suisse First Boston Analyst Report, European Chemicals (January 24, 2003); Deutsche Bank Analyst Report,
European Chemicals (September 5, 2003); Metzler Analyst Report, Celanese (August 4, 2003); UBS Analyst Report,
Celanese AG: Q3 Update (November 5, 2003).
________________________________________________________________________________________________________________

Professor Nabil N. El-Hage and Professor Timothy A. Luehrman, of HBS, and Heide Abelli (MBA 1993 and former equity analyst) prepared this
reading.

Copyright 2009 Harvard Business School Publishing. No part of this publication may be reproduced, stored in a retrieval system, used in a
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permission of Harvard Business Publishing.

Harvard Business Publishing is an affiliate of Harvard Business School.

 The Blackstone Bid for Celanese AG

CelaneseAGin2003

Celanese AG (Celanese) was a global industrial chemicals manufacturer headquartered in

Kronberg, Germany. In 2002, Celanese had revenues of 4.3 billion (US$4.9 billion) and 10,700
employees worldwide. It was operating in a difficult market environment, reflecting the recent
turnofthechemicalscycle:2002salesweredown9%fromthepreviousyear.

Celanese operated 25 production facilities in 11 countries in the Americas, Europe, and Asia, as
wellassixresearch&developmentcenters.In2003,Celanesegenerated47%ofnetsalesinNorth
America,41%inEurope,11%inAsiaandAustralia,and1%intherestoftheworld.Nevertheless,
inmanyrespects,CelanesewasaU.S.company.Thebulk(62%)ofCelanesesassetswerelocated
inNorthAmerica(48%intheUnitedStates),aswereitsemployees(59%inNorthAmerica,42%
specificallyintheUnitedStates).

Celaneseoperatedinfiveprincipalbusinesssegments:AcetylProducts(49%ofsalesatQ32003);
Chemical Intermediates (19% sales); Acetate Products (13%); Ticona, which produced technical
polymers(16%);andPerformanceProducts/Nutrinova,whichproducedartificialsweeteners(3%).
CelaneseheldNo.1orNo.2marketpositionsinmorethan70%ofitsproductareas.

Celanese had a long and rich history with both European andNorth American roots. In 1912, a
European entrepreneur, Alexander ClavelRespinger, and Dreyfus brothers Henri and Camille
foundedCellonitGesellschaftDreyfus&Co.inSwitzerlandtoproducefireproofcelluloidoutof
cellulose acetate. In the buildup to World War I, the Dreyfus brothers diversified into
manufacturingairplanepaint.Atthesametime,aU.S.Celanesecompanywassetup.However,
when the war ended in 1918, paint contracts dried up and Celanese switched to commercial
productionofacetateyarn.AfterWorldWarII,theuseofacetatetowincigarettefiltersopened
upalargenewbusinessarea.Meanwhile,intheUnitedStates,Celanesealsoestablishedplantsin
Texasfortheproductionofacetaldehyde,formaldehyde,methanol,andacetone.

In 1961, Hoechst AG of Germany and Celanese Corporation of America set up the Ticona
Polymerwerke joint venture. It started producing Hostaform, a highperformance plastic for
technicalapplications,in1963.In1987,HoechstAGacquiredCelaneseCorporationofAmericafor
$2.85 billion in a friendly takeover. The acquisition strengthened Hoechsts fiber, organic
chemicals,andspecialtychemicalsbusinesses.

In October 1999, Hoechst spun off Celanese AG asa publicly traded stock corporation listed on
theNewYork(NYSE:CZ)andFrankfurt(CZZ)stockexchanges.Immediatelyfollowingthespin
off,Celanesestocktradedat16pershare.TiconaGmbH,awhollyownedsubsidiaryofCelanese
AG, was established to operate the technical polymers business (polyacetal and ultrahigh
molecularweightpolyethylene)independently.Duringthethirdquarterof2003,Celanesestock
tradedwithinafairlybroadrange,reachingahighof31.88andalowof20.52ontheFrankfurt
StockExchange.

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The Blackstone Bid for Celanese AG

The companys largest single shareholder was Kuwait Petroleum Corporation, which owned
approximately 29% of Celaneses outstanding shares. Institutional shareholders (including, for
example,FidelityInvestments)held55%(U.S.30%andEuropean25%),retailinvestors10%,and
employees6%oftotalshares.

TheChemicalIndustryandCelanesesPosition

Thechemicalindustryconsistedofmanufacturersthatconvertedrawmaterials(feedstocks)into
chemicalproductsusedinavarietyofindustrialandconsumerapplications.Forexample,inits
Chemical Products segment, Celanese purchased raw materials such as natural gas, ethylene,
butane,andpropylenetoproducebasicchemicalssuchasvinylacetatemonomer(VAM).VAMin
turnwasusedbyCelanesesindustrialcustomersinavarietyofadhesives,paints,films,coatings,
and textiles. Other examples of enduse markets that Celanese products served included
pharmaceuticals and building products (Chemical Products), textiles (Acetate Products), and
manufacturersofautomotiveandelectronicproducts.

Chemicalmanufacturersweredividedintotwotypes:specialtyandcommoditychemicalfirms.In
2003, Celanese was primarily a commodity chemicals firm (approximately 70% of sales).
Commodity chemicals were relatively simple, lowvalueadded products usually sold in large
quantitiesatarelativelylowpriceperunit.Commoditychemicalmarketswerecharacterizedby
significant price competition. In the Chemical Products segment, Celanese listed over 15
competitors (including major competitors such as BASF, British Petroleum, Eastman Chemical,
and DuPont) and in Acetate Products seven competitors (including Acordis, Eastman, and
Rhodia).

Celanese maintained a leading position in many of its markets by achieving and continuously
improvingitslowcostpositionthroughproprietarytechnologiesandverticalintegration.Since
2001, Celanese had implemented several restructuring programs to improve efficiency and
profitability. Celanese also sought to lower costs by advanced process control and Six Sigma
statisticaltools.CelanesesproductsheldaNo.1positionintheAcetyls(VAM),AcetateProducts
(acetatetow),Ticona(polyacetate),andPerformanceProducts(sorbates)segments.ItheldNo.2
and No. 3 positions in Chemical Intermediates products (oxo alcohols & acylic acid) and other
Acetylsproducts(polyvinylalcohol,methanol).

TheCyclicalNatureoftheChemicalIndustryandImplicationsforCelanese

Cyclicalityindemandandsupplywereconstantfeaturesofthecommoditychemicalsbusiness.It
generally required two to three years for additional capacity, either plant expansion or new
construction, to come online and be fully operational. In periods of rising demand, large plants
were constructed, sometimes at a rate outstripping actual demand growth, due to a need to
achieve economies of scale. When demand fell, the industrys high fixed costs caused chemical
producers to compete aggressively on price in order to maximize capacity utilization. Investors
wereawareoftheindustrycycle,andanalystsspentconsiderableefforttryingtoforecastturning

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 The Blackstone Bid for Celanese AG

points.Often,forexample,commoditychemicalsstockstrendedupwardasmuchassixmonths
beforeanactualimprovementinchemicalproductioneconomics.

In years of tight supply, including some due to raw material shortages, firms experienced high
operating rates (over 90%), higher selling prices, and attractive margins. In contrast, years of
oversupply due to economic recession in enduse markets, reduction in business activity in
enduse markets, or excess plant capacity resulted in depressed operating margins, declining
capacityutilizationrates,andlowersellingprices.ThetwoCelanesedivisionsthatwerethemost
sensitive to changes in the U.S. economy were Acetyl Products and Chemical Intermediaries,
which together represented 55.6% of estimated 2003 EBITDA. The cyclicality of the chemical
manufacturing business was exacerbated by the natural cyclicality in many of the enduser
markets(automotive,electrical,construction,andtextileindustries),overwhichCelanesehadno
control.OvercapacityinendusermarketsaffecteddemandforandpricingofCelanesesproducts.
Celanese,with12%oftotal2003salesderivedfromtheautomotivesector,wasmorevulnerable
thanotherchemicalproducerstoswingsinthissector.Tocompeteeffectively,Celanesehadbeen
cuttingcostsandlookingforefficiencies.

Finally,CelanesewasalsoespeciallyvulnerabletothevagariesofthechemicalcycleinitsAcetyl
Products segment (methanol, formaldehyde, acetic acid, and vinyl acetate monomer). Some
analystsspeculatedthattheacetylsmarkethadhitalowpointinthechemicalscyclein2001,and
hadalreadyrecoveredtoamidcyclepositionby2003(seeExhibit1forcorrespondingtrendin
theCelanesestockprice).However,identifyingwhereinthecycletheindustrywasinlate2003
remainedasignificantchallengefraughtwithuncertainty.

ManagingRawMaterialsRisks

CommoditychemicalproducerssuchasCelanesealsofacedvolatilityinrawmaterialspricesand
uncertainty about the availability of some raw materials. Raw materials prices were affected by
capacityissues,generalbusinessactivity,andgovernmentregulation.Rawmaterialswereusedas
primaryinputs,intermediateinputs,andforenergyrequirements(petrochemicals,electricity,and
coal). In theUnited States, the chemical industryaccounted for7% of U.S.energy consumption.
Halfofenergyinputswereusedbychemicalcompaniesasrawmaterials,theotherhalfforfuel
and power. As raw inputs to the Chemical Products segment, Celanese purchased natural gas,
ethylene, butane, and propylene; for the Acetate Products segment, it also bought wood pulp.
Celanesesoughttoimproveitsprofitmarginsbypassingincreasesinrawmaterialspricesonto
themarketwhenpreexistingcontractualobligationsdidnotpreventthat.

TheChemicalIndustryin2003

Commoditychemicalproducersfacedachallengingeconomicclimatein2003.TotalU.S.industry
productionofchemicalswasprojectedtodeclineby4%bytheendof2003.Agroupof20major
U.S.commodityanddiversifiedchemicalscompaniestrackedbyStandard&Poorsposteda$766
millionnetlossinthethirdquarterof2003,comparedwithanetincomeof$1.2billionjustone
year earlier. Performance was affected both by higher rawmaterials and fuel costs, as well as

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The Blackstone Bid for Celanese AG

reduced manufacturing demand. In the first two quarters of 2003, many industrial customers
decidedtoreduceinventoriesinresponsetopriceincreasesbychemicalmanufacturers,butthere
were some signs that this trend had improved by the third quarter of 2003. Many chemical
manufacturersalsofacedhigherexpensesforpensionbenefits,becausebothlowinterestratesand
adecliningstockmarketsince2000hadreducedthereturnsonpensionfundassets.

More broadly, three secular trends were forcing longterm changes in the chemical industry.
These were globalization, consolidation, and regulation. The U.S. chemicals industry was
considered mature, with only modest growth expected in key markets (automobiles and
construction). In contrast, Latin American and Asian countries, with their rapidly developing
economies, were viewed as the markets of the future. To respond, U.S. chemical suppliers were
building production facilities overseas, often to serve their U.S. customers that were relocating
there. Consolidation among chemical industry players was an ongoing phenomenon, as it
promised efficiencies in manufacturing and purchasing. Finally, increasing environmental
regulationandlitigationonbothsidesoftheAtlanticimposedcostsandrisksthatwerehardto
predict.TheEuropeanUnionwasconductingriskassessmentsof140chemicals,includingVAM
producedbyCelanese,fortheircarcinogenicrisks.IntheUnitedStates,Celanesewassubjectto
Superfund requirements to clean up contaminated production sites, and many companies had
asbestosliabilityexposurerelatedtotheirproductsandpremises.

BlackstonesInterestinCelanese

It was against this industry backdrop that Blackstone was evaluating a potential acquisition of
Celanese. Blackstone had been considering this move for nearly two years, since early 2002.
Strategically,inCelanesesChemicalProductssegment,Blackstonesawsignificantopportunityto
expand through further downstream integration. Blackstone believed this would increase its
Chemical Products segment margins, reduce earnings volatility, and increase its valuation
multiple. Blackstone also viewed the Ticona business as attractive, given its broad geographic
scope,strongcustomerrelationships,favorablestrategicalliances,andattractivemarketpositions
inpolyacetalandultrahighmolecularweightpolyethylene.

InMarch2002,representativesofBlackstoneandCelanesefirstmetforadiscussioninFrankfurt,
Germany, along with their respective M&A advisers (Morgan Stanley for Blackstone, Goldman
SachsforCelanese).AnothermeetingfollowedinMay2002,inNewYork.Blackstonesubmitteda
duediligencerequesttoCelaneseonJune18,2002,andonJuly26,2002,executedaconfidentiality
agreement. On the basis of information submitted to Blackstone (most of it publicly available)
between August and October 2002, Blackstone submitted an initial expression of interest on
November 13. Celanese management responded with concerns about Blackstones post
acquisitionstrategy.

In January 2003, a Blackstone executive called Celanese to reaffirm Blackstones interest in

proceedingwithanacquisition.Throughoutthespringandsummerof2003,Blackstoneanalyzed
publicly available data to further inform its perspective on the value of Celanese in preparation
for active negotiations. Blackstone focused special attention on the financial health of several of
Celaneses businesses, in addition to its large unfunded pension obligations. As required by the

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 The Blackstone Bid for Celanese AG

German Stock Corporation Act, Celanese had a twotier board system consisting of a board of
management (Vorstand), comprising four directors, and a supervisory board (Aufsichtsrat),
comprising12members,halfelectedbyemployeesandhalfbyshareholders.Ofthesixemployee
representatives on the supervisory board, four were Celanese employees and two were union
representatives. Blackstone was acutely aware that the employees on the Aufsichtsrat would be
keenly interested in any plan that Blackstone had regarding a supplemental, upfront cash
contribution to the pension plan as a component of the deal. Blackstones deal team would also
need to carefully consider another element of the deal that would interest members of the
Vorstand:Blackstonesproposedstockoptionpoolformanagement.

Blackstone also came to believe that Celaneses value was sensitive to the current state of the
chemicals cycle and prospects for an early rebound in the cycle. Blackstones views were not
unique: Many investment analysts regarded Celanese as one of the most cyclical European
chemical companies, with the largest relative pension deficit and most aggressive actuarial
assumptions(assetgrowth,discountrate)amongitsEuropeanpeers.However,theseassumptions
were based on historically higher returns of U.S. equities as compared with European equities.
Among European chemical companies, Celanese was viewed as having the biggest risk to cash
flow if pension plan assets did not increase. It was heavily dependent on the level of economic
activity, especially in the United States, and vulnerable to fluctuations in base energy and
feedstock prices. Blackstones deal team and investment committee would need to consider
carefullythemyriadassumptionsunderlyingbothoperatingandpensionfundperformance.The
firmexpectedtoperformextensiveduediligenceintheseareasinsupportofafinalbid.

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The Blackstone Bid for Celanese AG

Exhibit1:CelaneseAGshareprice(Q12002Q32003,eurospershare)2

Celanese AG share price

35

30

25

20
High
EUR

Low
15

10

0
2002 Q1 2002 Q2 2002 Q3 2002 Q4 2003 Q1 2003 Q2 2003 Q3

2 Source: Celanese AG, Form 20-F, December 31, 2003.