2

Consolidation as a route to transformation

Presentation by

The Boston Consulting Group

Udo Jung, Senior Partner & Managing Director

Mirko Rubeis, Partner & Managing Director

November 27, 2017

Copyri

ght

© 2

017 b

y T

he B

ost

on C

onsu

ltin

g G

roup,

Inc.

All r

ights

rese

rved.

3

BCG supports chemical and petrochemical clients in their key issues

• Transformation

programs

• Org development

We annually publish the

"Value creator in

chemicals report".

The 2017 version is now

available @

bcg.perspectives.com

4 Copyri

ght

© 2

017 b

y T

he B

ost

on C

onsu

ltin

g G

roup,

Inc.

All r

ights

rese

rved.

Part I: State of consolidation of the global petrochemical industry

Part II: Implication of consolidation on GCC producers

5 Copyri

ght

© 2

017 b

y T

he B

ost

on C

onsu

ltin

g G

roup,

Inc.

All r

ights

rese

rved.

Sources of TSR for top-quartile performers (S&P Global 1200, 1996–2016)

In the long-term, growth is the most important driver of value creation and consolidation enables growth

0

10

20

30

40

Change in annual TSR (%)

10 years

64%

16%3%

17%

5 years

54%

16%13%

17%

3 years

46%

20%

17%

17%

1 year

28%

11%

43%

18%

Revenue growthMarginMultipleFree cash flow

Note: The rolling analysis covers one-, three-, five-, and 10-year time frames from 1996 through 2016. Shows the average of performers in the 65th to 85th

percentile to illustrate approximate cutoffs for the top quartile. ie., not the average of the top quartile (which would be equivalent to the 88th percentile)Source: S&P Capital IQ; BCG ValueScience Center

6 Copyri

ght

© 2

017 b

y T

he B

ost

on C

onsu

ltin

g G

roup,

Inc.

All r

ights

rese

rved.

-20

0

20

40

-20 -10 0 10 20 30 40

Annual TSR (%)

Average annual revenue growth (%)

Value-creating growth

Value-destroying growth

No Growth

Correlation of revenue growth and TSR (S&P Global 1200, 2006 – 2016)

However, not all growth is value creating!

Source: Compustat; BCG ValueScience Center

Copyri

ght

© 2

017 b

y T

he B

ost

on C

onsu

ltin

g G

roup,

Inc.

All r

ights

rese

rved.

7

How to master the value triangle?

Value lever

growth

Consolidation

(& value chain

integration)

New growth

platforms

(& diversification)

Portfolio

coherence &

portfolio

migration

Source: BCG Experience

Portfolio coherence means capability coherence

8 Copyri

ght

© 2

017 b

y T

he B

ost

on C

onsu

ltin

g G

roup,

Inc.

All r

ights

rese

rved.

Companies from asia and emerging markets have led the chemical industry in terms of value creation in the last 20 years

20-year (1997–2016) TSR10-year (2007–2016) TSR Rank

2

1

4

3

5

29.8%

19.1%

19.4%

21.9%

18.6%

23.0%

17.4%

20.6%

22.9%

16.0%

Source: S&P Capital IQ; BCG value creators report (2017); BCG analysis

Value

creation

champions

employed

M&A

and

Consoliation

9 Copyri

ght

© 2

017 b

y T

he B

ost

on C

onsu

ltin

g G

roup,

Inc.

All r

ights

rese

rved.

150

0

1.500200

500

100

0

50

1.000

102

85

4849

86

4938

66

86

56

392630

No.

of deals$ B

2000

3833

2008 2009 2010 2011 2012 2013 2014 2015

75%

2017

84

166

2003 2004 201620052002 2006

80

2001 2007

After its slump in 2009, M&A deals are on the risein the industry

Mega deals (> $1B)Deals > $10BNo. of deals Normal dealsSelected deals:

Buyer/target ($x.xB)

Note: Announced M&A worldwide deals from January 1, 2000, to YTD Q3 2017, with a chemical company involved as buyer, seller, or targetSource: Thomson ONE; BCG analysis

BOC/Linde

($15.5B)

Basell/Lyondell ($18.8B)

ICI/Akzo Nobel ($15.7B)

Rohm&Haas/D

ow ($18.5B)

DuPont/Dow

($68.5B)

Syngenta/

CNAC ($44.2B)

Airgas/Air

Liquide

($13.4B)

Sigma Aldrich/Merck

($16.5B)

Cytec/Solvay ($6.1B)

10 Copyri

ght

© 2

017 b

y T

he B

ost

on C

onsu

ltin

g G

roup,

Inc.

All r

ights

rese

rved.

Apr-14Sep-10

20,0x

15,0x

10,0x

5,0xDec-17Jun-17Jan-17Jul-16Feb-16Sep-15Mar-15Oct-14Nov-13May-13Dec-12Jun-12Jan-12Jul-11Feb-11

Solvay/ Rhodia

HB Fuller/Royal Adhesives

BC Partners/Ceramtec

BASF/Solvay Polyamide

Evonik/Huber Silica

Solvay/

Cytec

CCMP Capital/

Solvay ECO

Services

Solvay/

Chemlogics

Blackstone/Solvay Acetow

Advent International/

Cytec—Coating Resins

Cytec Industries/

Umeco

Carlyle/Atotech

Lanxess/Chemtura

Golden Gate Capital/

Angus Chemical

CD&R/

Ashland Water

Technologies

Cinven/

CeramTec

(Rockwood)

Golden Gate Capital/

ArrMaz Custom Chemicals

Carlyle Group/

DuPont—

Performance

Coatings

Apollo Global

Managemant/

Taminco

Berkshire

Hathaway/

Lubrizol

Dow/

DuPont1

Agrium/

Potash

Symrise/

Diana

Bayer/Monsanto

ChemChina/Syngenta

Sherwin-Wiliams/

Valspar

Evonik/Air Products

Performance Materials

Lonza/Capsugel

Air Liquide/

Airgas

Platform/

Alent

3M/Polyphore

Mosaic/Vale fertilizer assets

Westlake/Axiall

Praxair/Linde

IMERYS/Kemeos

Lanxess/Chemours Clean & Disinfect

Allnex/

Nuplex

Lonza/InterHealth Neutraceuticals

Air Products/YingdeHubei Sanonda/AdamaKraton Polymers/

Arizona Chemical

Dow

Chemical/

Olin

Apollo Global

Management/

PAH/OM GroupTronox/

FMC

Albermarle/

Rockwood

FMC/Cheminova

Platform/Arysta

Arkema/Bostik

Eastman/

Taminco

Kraton Polymers/

Styrenic Block

Copolymer

Business of

LCY Chemical

Chemtrade/

General Chemical

W.R. Grace/

Dow Polypropylene

& Catalysts

Altana

Rockwood Clay

Based Additives

Praxair/

NuCO2

Consortium/

OM Group –

Advanced Materials

Royal DSM/Kensey Nash

Ecolab/Champion Technologies

EcoLab Inc/

Nalco Holding

DuPont/

Danisco

China National Bluestar/

Elkem (Orkla)

Clariant/SudChemi

Lonza Group Ltd/

Arch Chemical Inc

Eastman/Chemical/

Solutia Inc

Ashland Inc/

International Specialty

Products (ISP)

Rhone and Triton/

Carbon Black

M&A activity continues to accelerate

Strategic Financial

Overall average transaction multiple:

Average transaction multiple of strategic acquisitions:

10.4x

10.8x

Average transaction multiple of financial acquisitions: 9.0x

1. Not to scale. Represents the companies' blended average unaffected multiple

Note: Bubble sizes indicate enterprise value; Naming convention: Acquirer/Target

Source: Capital IQ, mergermarket, BCG analysis

Key chemical deals—EV and transaction multiple Multiple of last twelve month EBITDA

11 Copyri

ght

© 2

017 b

y T

he B

ost

on C

onsu

ltin

g G

roup,

Inc.

All r

ights

rese

rved.

Consolidation is happening across all areas in the chemical industry to build scale and drive synergies

Diversification and new growth

platforms Base chemicals and polymers Specialty chemicals & gases

Selected large M&As

from the last 3 years

PVC

Stryenics

PVC

PVC

Agro

Agro

Additives

Silica

Additives

Gases

Gases

Source: Thomson One deal Database; BCG Analysis

12 Copyri

ght

© 2

017 b

y T

he B

ost

on C

onsu

ltin

g G

roup,

Inc.

All r

ights

rese

rved.

North America, Europe and China dominate the consolidation landscape with ~ 80% of all deals

Value of consolidation by geography1 ($ M, 2007-2017)

300

200

100

0

$ B

Rest of World

26

Middle East

& Africa

22

Asia (ex-China)

106

China

111

Europe

230

North America

296

1. Region is allocated on the basis of region of headquarters of the acquirer company Note: Announced M&A worldwide deals from January 1, 2005, to YTD Q3 2017, with a chemical company involved as buyer, seller, or targetSource: Thomson One deal Database; BCG Analysis

13 Copyri

ght

© 2

017 b

y T

he B

ost

on C

onsu

ltin

g G

roup,

Inc.

All r

ights

rese

rved.

Some companies have used consolidation to build leadership in specific product segments (example – INEOS in PVC)

• Minority stake in EVC ('01); full share

purchased ('05)

• Other vinyl unit purchases from

Norsk Hydro ('07), Tessenderlo

Chemie ('12)

• Inovyn JV with Solvay ('15); full

purchase of Inovyn ('16)0

10

20

30

6,000

4,000

2,000

0

kT

15

31.0%

10

%

19.6%

05

15.2%

00

13.6%

Ineos share (Europe)EDC VCM PVC

PVC chain consolidation

Source: BCG Chemcom 2.0; Nexant; Thomson One Deal database; BCG Analysis

15 Copyri

ght

© 2

017 b

y T

he B

ost

on C

onsu

ltin

g G

roup,

Inc.

All r

ights

rese

rved.

Some companies are using consolidation and subsequent "carve-outs" to create 'coherent portfolios'

50/50 merger creating a

global leader in agriculture,

material science and

specialty products

I. Agriculture

Revenue ~ $19B

~$11B

Agriculture

~$7B

Agricultural

sciences

III. Specialty products

Revenue ~ $21B

~$15B

Electronics

Communications

Safety and

Protection

Nutrition

Industrial

biosciences

~$6B

Consumer

solutions: Dow

Electronic

Materials

II. Material science

Revenue ~ $43B

~$41B

Performance

Plastics

Performance

Materials

Infrastructure

Solutions

Consumer Solutions

~$2B

Performance

Materials

1. $2 B from Consumer Solution, $2 B from Infrastructure Solutions and $4B from Performance materials to be moved. Revenue numbers include changes from Split; Source: DOW – DuPONT Investor Communication; BCG analysis

$8B business

recently announced

to move from

Material Science to

Specialty products1

From Performance

Materials

From Consumer

Solutions

From Infrastructure

Solutions

16 Copyri

ght

© 2

017 b

y T

he B

ost

on C

onsu

ltin

g G

roup,

Inc.

All r

ights

rese

rved.

Segment consolidation is single most relevant M&Adriver

Key M&A rationales – % of deals

Recent deal examples

Acquirer Target Deal value

Geographic Expansion

8%

Portfolio Expansion/

Complementary Portfolio

24%

37%

Feedstock Access

22%

Segment Consolidation1

Financially motivated

47%

$2.3 B

$66 B

$0.4 B

$4.9 B

$5.0 B

coatings

Chlor alkali

1. Achieve (global) leadership position within certain Chemicals segmentNote: Share of top deals > 2bn. USD (N=51) announced between 2007 and YTD 2017; Several rationales can apply for each dealSource: Thomson ONE; BCG analysis

Polypropylene

17 Copyri

ght

© 2

017 b

y T

he B

ost

on C

onsu

ltin

g G

roup,

Inc.

All r

ights

rese

rved.

2.0%

Henkel

–

Nat’l

Starch

(2008)

14.1%

10.0%

10.6%

5.4%

5.2%

BASF

–

Ciba

(2009)

12.0%

Evonik

–

Air

Products

(2016)

7.4%

Akzo

–

ICI (2008)

8.8%

Solvay

–

Rhodia

(2011)

4.8%

Aditya Birla

–

Columb.

Chem.

(2011)

5.0%

East-man

–

Solutia

(2012)

2.9%

Ashland

–

ISP

(2011)

3.1%

PPG

–

Georgia

Gulf (2013)

3.5%

Ecolab

–

Nalco

(2011)

3.7%

Solvay

–

Cytec

(2015)

5.7%

Sherwin

Williams

–

Valspar

(2016)

6.0%

3.3%

DSM

–

Fortitech

(2013)

10.0%

BASF

–

Cognis

(2010)

9.4%

Merck

–

Sigma

Aldrich

(2015)

9.6%

6.3%

Clariant

–

Süd

Chemie

(2011)

8.9%

1.8%

7.1%11.9%

East-man

–

Taminco

(2014)

5.0%

Air Liquide

–

Airgas

(2015)

5.6%

Ecolab

–

Cham-

pion (2013)

12.5%

ADM

–

Wild

Flavors

(2014)

13.9%

4.1%

DuPont

–

Danisco

(2011)

16.4%

9.8%

6.6%

Dow

–

DuPont

(2016)

Our analysis shows that consolidation creates growth and cost synergies on an average of 8%

Total synergies

Cost synergies

Growth synergies

Synergies as percentage of target company sales

2008–2016 acquisitions in the chemicals/life sciences industry

~8%

Source: Acquirer or target investor relations reports, analyst reports; BCG analysis

Winning Strategic rationales of M&A however are more crucial

18 Copyri

ght

© 2

017 b

y T

he B

ost

on C

onsu

ltin

g G

roup,

Inc.

All r

ights

rese

rved.

Consolidation prevents mature markets from Eroding competitiveness

PP StyreneHDPE

82%

58%

38%

86%

32%

76%

59%

55%

67%

30%

73%

62%

42%

57%

31%

North America

Europe

Asia

Global

Middle East

Top 5

capacit

y s

hare

in e

ach

of

the m

ark

ets

(2016)

19 Copyri

ght

© 2

017 b

y T

he B

ost

on C

onsu

ltin

g G

roup,

Inc.

All r

ights

rese

rved.

Global M&A activity level of champions in the chemical industry

0

5

10

15

20

0.6 0.80.20.0 1.80.4 1.6

10 year TSR (%)

10 year M&A Activity Level1

DuPont Lotte Chemical

Solvay

CF Industries

PPG

Sherwin Williams

DSM

Bayer

SABIC

FormosaPlastics

Sinopec

DowChemical

BASF

Deal Size, $5B

1. M&A Activity Level: (Deal values Acquisitions + Divestments)/current Market Cap

Source: Thomson ONE Banker; Thomson Reuters DataStream; BCG Analysis

Deal value last 3 years

21

Ultimately, consolidation can lead to different 'winning business models'

Multi-

specialties

• Segment consolidated

• Superior performance

• Size limitations

Diversified

Value chain

optimizers

Feed stock

monetizers

• Leadership in several

specialty segments

• Parenting advantage

across segments

• Portfolio coherence?

• Portfolio migration

• Feed advantage

(partially eroding)

• Offer SOEs

• Value chain consoli-

dates and integrators

• Coherent portfolio,

deep integrations

Focused

specialties

22 Copyri

ght

© 2

017 b

y T

he B

ost

on C

onsu

ltin

g G

roup,

Inc.

All r

ights

rese

rved.

In summary, consolidation can enable value based transformation

Become a market leader via segment consolidation & roll-up

(Ineos – PVC, Styrenics; Indorama – PET, LANXESS- additives)

Portfolio migration towards more coherence for superior

shareholder returns (e.g. Dow DuPont, Solvay, LANXESS, ...)

Support value chain integration to capture additional value

(e.g. Indorama – PET; Borealis – compounding & recycling;..)

Move to new segments & leverage capabilities

(e.g. Merck – Millipore, Sigma Aldrich, DuPont – Danisco..)

Improve competitiveness via cost synergies – incl. site

network (e.g. BASF – Ciba)

Accelerated capability building (e.g. SABIC – GE Plastics;

ChemChina – various;....)

Sometimes Consolidation is a necessity and not just an option

23 Copyri

ght

© 2

017 b

y T

he B

ost

on C

onsu

ltin

g G

roup,

Inc.

All r

ights

rese

rved.

Part I: State of consolidation of global petrochemical industry

Part II: Implication of consolidation on GCC producers

24

GCC petrochemical producers are facing several challenges

Lower oil prices depressing petrochemical prices

Increasing self-sufficiency in China

Reduced availability of advantaged feedstock in GCC

Removal of feedstock, power subsidies

Limited local demand for chemicals

Internal

factors

External

factors

Increasing competition from US shale producers1

2

3

4

5

6

26

Growth for GCC producers is currently constrained

Base chem.Intermediate /

Comm. chemicals

High volume

spec. chemicals

Niche or application

specialty chemicals

Base

chemicals /

commodity

Downstream expansion

Current Portfolio

I. Expansion of commodities• Critical mass needed to explore investments in other regions with

advantage feedstock (e.g. US)

II. Expansion into selected derivatives/

high vol. specialties • Critical mass needed to partner or acquire key

technology owners

III. Expansion into niche or low

vol. specialties • Critical mass needed to invest

internationally close to demand

centers

27 Copyri

ght

© 2

017 b

y T

he B

ost

on C

onsu

ltin

g G

roup,

Inc.

All r

ights

rese

rved.

Industry consolidation will help GCC producers to improve competitiveness

Scale up

marketing

Achieve

portfolio

coherence

Reduce cost

Enhance

capabilities

Increase

attractiveness

to potential

partners

• Build scale in certain products and help

develop market leadership; develop

international marketing to capture more

value

• Merger and carve out of portfolio to develop

focused portfolios (e.g. specialty only,

commodity only)

• Reduce cost through scale and synergies

• Leverage complementary capabilities and

scale to invest in innovation

• Increase competitiveness and scale to

increase attractiveness to other partners; can

also help in expansion of feedstock to other

advantaged regions

✓

✓

✓

✓

✓

28 Copyri

ght

© 2

017 b

y T

he B

ost

on C

onsu

ltin

g G

roup,

Inc.

All r

ights

rese

rved.

Consolidation will also support economic development agenda of GCCcountries

Increasing competitiveness of smaller stand-

alone companies

Creating regional champions in some product

segments and competing with global peers

Laying the foundation for value chain integration

– developing derivatives linked to core production

to support downstream industries

Increasing the competitive advantage of

production clusters (e.g. large sites like

Jubail, Yanbu)

1

2

3

4

29 Copyri

ght

© 2

017 b

y T

he B

ost

on C

onsu

ltin

g G

roup,

Inc.

All r

ights

rese

rved.

ME players can think about consolidation along 3 geographical dimensions

Limited to KSA which has several

players

Outright acquisitions difficult due

to presence of NOCs; but possible

JVs or other forms of cooperation

Can try to build "product

champions" for specific products

where ME players have relevant

global shares

Global

Regional

In

Country

30

Also, consolidation is not only M&A

Shared servicesCollaboration on shared services

functions

Site synergiesOutsource and sharing of

site services

Marketing agreementCompanies combine forces to capture value

from join marketing of certain products

Level of complexity in execution

Benefit accrued to

participating

companies

High

Low

Low High

JVs/ PartnershipsForming JVs for specific

projects/ products

M&AFull merger &

acquisition of companies

31 Copyri

ght

© 2

017 b

y T

he B

ost

on C

onsu

ltin

g G

roup,

Inc.

All r

ights

rese

rved.

Consolidation could result in different 'champions'

Commodity

champions (e.g.

polyolefins)

GCC based "semi-

specialty" player

GCC based

"downstream

integrated player"

1

2

3

More value capture from markets

through better pricing and better

Marketing & Sales network, product

portfolio

More value from consolidation of

coherent semi-specialty product

portfolios and specialization

More value from integration and

economies of scale

32 Copyri

ght

© 2

017 b

y T

he B

ost

on C

onsu

ltin

g G

roup,

Inc.

All r

ights

rese

rved.

M&A is risky – our research shows that >50% are not successful

On average, more than 50% of all acquisitions

destroy value

1-year RTSR of completed acquisitions1 (%)

Value

Destroyed

53%

Value

Created

47%

1. One-timers made 1 acquisition within the 5-year period, 1 to 2 acquisitions within the 10-year period, and 1 to 5 acquisitions over the 25-year period observed 2. Active buyers made 2 to 5 acquisitions within the 5-year period, 3 to 10 acquisitions within the 10-year period, and 6 to 25 acquisitions over the 25-year period observed 3. Portfolio builders made more than 5 acquisitions within the 5-year period, more than 10 acquisitions within the 10-year period, and more than 25 acquisitions over the 25-year period observed 4. RTSR = relative total shareholder return one year after the announcement date. 5The share of successful deals includes the percentage of deals in each category with a positive RTSRSource: Thomson Reuters Datastream; Thomson ONE Banker; BCG analysis. Note: This analysis is based on 37,299 transactions between 1990 and 2014

Success rate varies by type of acquirer

43

%Acquire opportunistically, not

an active part of the strategyOne-Timer21

51

%Executes deals on a regular

basis to strengthen portfolioActive-Buyer32

56

%Consolidate through serial

acquisitions

Portfolio-

Builder43

Deal performance below

average deal

Deal performance above

average deal

33

We recommend a thorough review of 5 key elements before GPCA members begin consolidation

Stand alone

attractiveness

1

2

3

4

Additional strategic value optionCareful attention should also be paid while evaluating the strategic advantage of consolidation (e.g. preempt competitor moves)

Improvement of joint competitive positionAbility to improve target (teach) and learn from target in spec. segments

SynergiesTop-line, bottom-line and EBITDA impact

Transaction feasibilityValuation, legal/financial risk, integration risk. In case of ME regulatory hurdles, an inadequate infrastructure for M&A can should also be taken into consideration.

5

1. Key criterion to assess stand-alone attractivenessSource: BCG analysis

Stand-alone attractivenessPortfolio attractiveness1

Emerging markets exposure Sustainability1

2

3

4

5