How Will M&A Reshape The Competitive Landscape Of The

Petrochemical Industry?

April 2017

Galid Lahdahda Executive Director

Chemicals & Refining Group Standard Chartered Bank

2

Standard Chartered Bank – Here For Good

Over 160 Years Of Rich Banking Heritage

Headquartered in London, United Kingdom

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Dedicated Chemicals & Refining Team

Part of wider Energy & Natural Resources Group

Track record of financing and advisory transactions across chemicals, refining, and fuel distribution segments

Deep industry knowledge, covering both regional and international players

Global coverage, with particular focus on Asia, Middle East, and Africa

Global Presence Across 68 Countries

3

Slowing Global Growth Has Impacted Demand And Energy Prices

Global GDP Growth Global Energy Prices (Indexed)

Sources: International Monetary Fund; Bloomberg; SCB Analysis

2010 2011 2012 2013 2014 2015 2016 2017

Brent Crude Henry Hub Natural Gas

Newcastle Thermal Coal

% Of 1 Jan 2010 Prices

(10%)

USD80.8 / mt

(32%)

USD52.8 / bbl

(43%)

USD3.2 / mmbtu

10.6%

6.6%

10.3%

7.6%

6.9%

4.8% 5.4%

3.1% 2.5%

1.6%

2.1% 1.9%

2010 2011 2012 2013 2014 2015 2016

China India ASEAN-5

Global U.S. E.U.

% Growth

4

Chemical M&A Deal Value Quintupled From 2012 Low

Sources: MergerMarket; SCB Analysis

Notes: Deal count inclusive of deals with undisclosed deal value

Global Chemical M&A Activity

Total Deal Count:

286 218 136 211 236 209 252 304 283 293

Deal Count With Deal Value More Than USD1 billion:

20 13 7 14 20 12 15 27 31 21

116

69

27

62

96

52 57

113

178

254

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Financial Buyer

Strategic Buyer

Deal Value In USD billion

5x increase in deal value

over 2012-16

5

2015 / 2016 Witnessed Series Of Record-Breaking Mega Deals Announced

Sources: MergerMarket; SCB Analysis

Mega Deals Over Last Decade

2015 2016 2016 2016 2007 2016 2008 2014 2007 2015

77

63

46 43

19 18 18 16 16 13

DuPont +Dow

Bayer +Monsanto

ChemChina+ Syngenta

Praxair +Linde

Access +Lyondell

Potash +Agrium

Dow + Rohm& Haas

Merck +SigmaAldrich

Akzo Nobel+ ICI

Air Liquide +Airgas

Completed

Pending

USD billion

2015 / 2016: four mega deals announced with

value more than USD40 billion

6

Mega Deals Look To Increase Scope And Unlock Value In Competitive, Slow

Growth Environment

Sources: Public Information; SCB Analysis

Buyer Target Deal Value

(USD billion) Rationale

77 Improving focus on business portfolio; expanding

product offerings with enhanced technology

Unlocking value with USD3 billion in synergies

63 Increasing scale and global reach; expanding product

offerings with enhanced technology

Unlocking value with USD1.5 billion in synergies

46 Enhancing China’s food security; building a global

presence; expanding product offerings with enhanced

technology

43 Expanding product offerings with enhanced technology

Unlocking value with USD1 billion in synergies

7

Transformational M&A Changes Chemicals Landscape And Ranking

Sources: Public Information; SCB Analysis

Notes: Revenue for Monsanto as of LTM Aug 2016; revenues for Mitsubishi Chemical and Airgas as of LTM Mar 2016; revenue for Sinopec as of 2015

Top 10 Chemical Companies By Revenue (2016)

73

66 64

50

35 32

29 26 26 25

DuP

on

t +

Dow

Baye

r +

Mo

nsan

to

BA

SF

Sin

op

ec

SA

BIC

Mitsu

bis

hi

Chem

ical

Pra

xair

+L

ind

e

Exxon

Mo

bil

Chem

ical

INE

OS

Air L

iqu

ide

+A

irg

as

Status Quo

Target

Buyer

Revenue in USD billion

1 2 3 4 5 6 7 8 9 10

Transformational deals altering landscape Original Ranking #

9

4

2

>10

>10

>10 10

>10

1

3

5 6 7 8

8 Sources: MergerMarket; SCB Analysis

Notes: Deal count inclusive of deals with undisclosed deal value

Intra-Regional Transactions Dominate M&A

Breakdown By Value (USD Billion)

For Period 2007 – 2016 Buyer Region

Europe North America Northeast Asia Others Total

Ta

rge

t R

eg

ion

Europe 15.0% 9.2% 5.5% 1.4% 31.1%

North America 14.3% 29.1% 0.7% 2.4% 46.5%

Northeast Asia 0.5% 0.4% 13.0% 0.2% 14.1%

Others 0.7% 1.0% 1.4% 5.1% 8.2%

Total 30.5% 39.7% 20.7% 9.0% 100.0%

Breakdown By Count

For Period 2007 – 2016 Buyer Region

Europe North America Northeast Asia Others Total

Ta

rge

t R

eg

ion

Europe 16.4% 4.8% 1.5% 2.3% 25.0%

North America 3.5% 16.1% 1.4% 1.3% 22.2%

Northeast Asia 1.5% 1.4% 30.3% 0.8% 33.9%

Others 2.8% 3.0% 2.4% 10.5% 18.8%

Total 24.2% 25.4% 35.6% 14.8% 100.0%

9

Chinese M&A Activity At All-time High In 2016

Sources: MergerMarket; SCB Analysis

Notes: Deal count inclusive of deals with undisclosed deal value

China’s Share Of Global Deal Count

China Deal Count:

26 28 60 91

China Deal Value (USD billion):

4 5 9 61

9% 13% 24%

31% 22%

24%

18%

20%

6% 5%

10%

9%

6%

9%

6%

8%

5%

5%

9%

5%

42% 38% 31%

21%

2007 2010 2013 2016

Others

U.K.

India

Germany

South Korea

Japan

U.S.

China

% Of Global Deal Count

10

ChemChina Has Been Spearheading Chinese M&A Wave, Focusing Mainly

On International Targets

Sources: Public Information; SCB Analysis

Value of acquisitions over last 5 years exceeds USD60 billion

Announced

Date Target Stake Description Country

Deal Value

(USD billion)

Jul 2016 40% Manufacturer of crop protection products, crop

enhancers, and seed treatments 1.4

Feb 2016 100% Manufacturer of crop protection products and seeds 46.0

Jan 2016 12% International trader of commodities NA

Jan 2016 100% Manufacturer of machinery for plastic production 1.0

Mar 2015 100% Manufacturer of tires 8.8

Jan 2011 100% Manufacturer of silicon, silicones, ferrosilicon,

foundry alloys, carbon materials, and microsilica 2.3

Jan 2011 60% Producer of crop protection products 2.5

11

What Has Triggered M&A Surge During 2015 And 2016?

Limited returns on organic investments due to low growth

Strengthened balance sheets

Sustained low borrowing costs

Tectonic shifts in feedstock costs

Ripple effect of competition pursuing targets

Portfolio management initiated by activist investors

12

M&A Is Key Instrument To Achieve Expedited Expansion Of Scale And

Scope

Inorganic Growth

Benefits

Faster reaction time to industry trends

Relatively higher returns in low growth industry

Value creation through synergies

Bypassing barriers for new markets and access to

new technologies

Sustaining relative industry position and

profitability

Immediate cash flow contribution

Risks

Poor quality / scarcity of targets

Over paying resulting from competition

Hidden liabilities

Regulatory constraints

Post-merger integration risks

Organic Growth

Benefits

Better control and flexibility over growth plans

Less disruption to ongoing business

Growth potentially at a lower cost

Higher return; development premium

Leading edge technology, tailored investment

Risks

Limited resources and reach

Slower build and growth rate

Longer time-to-market; delay to reaping cash flow

benefits

Cost overrun

13

Generally M&A Is Used As Tool To Grow Or Protect Value

Portfolio management geared towards growth, higher margins, and lower volatility

Growing market share or entering into new markets / segments

Sustaining relative industry position and profitability through defensive M&A

Securing access to feedstock and / or end-markets

Capture synergies – on both costs and revenues

Moving closer to customers

Enhancing capabilities – R&D, technology, operations

Protecting bargaining power by matching size of suppliers and offtakers

Monetising non-strategic positions and focusing on core

14

Both Operational And Financial Synergies Materially Move Meter On Value

Operational Synergies

Revenue Synergies

Higher pricing power as a result of increased

market share and customer base

Increased product offerings through cross-selling

strategies

Increased sale force efficiency

Growth acceleration through pursuing more

opportunities with more resources in hand

Cost Synergies

Effective sourcing of materials

Shared facilities and corporate functions

Improved utilisation of existing infrastructure

Better integration of facilities

Energy savings

Financial Synergies

Improved credit rating and / or lower cost of capital

for the combined entity

Improved capital allocation (e.g., merger of

company with excess capital with company

offering significant investment opportunities)

Reduced investment requirements for combined

entity

Lower tax base (e.g., potential losses carried

forward)

Lower tax residency

15

Trend To Move Towards Higher Value-Add Segments Via M&A

Feedstock End-Market

Sp

ec

ialt

y

Co

mm

od

ity

Cost-focused players who are

highly focused on feedstock

production (e.g., olefins,

polyolefins, aromatics)

Diversified players who, mostly

through M&A, are vertically

integrated from feedstock

production to meeting end-market

needs

Customer-focused players who are

highly attuned to end-market

needs (e.g., customisable

products)

Prevailing trend of players moving

towards higher value-add product

segments via portfolio management

16 Sources: FactSet; SCB Analysis

EV / EBITDA Of Top Chemical Companies By Segments

Investors Reward Specialty Companies With Higher Multiples

11.5x

7.9x

7.2x

3x

6x

9x

12x

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Specialty Commodity Diversified

17

2015 / 2016 Tailwinds Expected To Prevail; Valuation And Overhang Of

Political Interventions Main Impediments

Limited returns on organic

investments due to low growth

Strengthened balance sheets

Tectonic shifts in feedstock

costs

Seeking access to advanced

technologies

Moving closer to end customers

2017 Drivers

Relatively high valuations

Feedstock price volatility

Politically-driven interventions

Economic volatility

2017 Impediments

18

THANK YOU

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20 Sources: Bloomberg; SCB Analysis

Cost Of Funding (10-Year Yield)

Cost Of Funding Continues To Remain Relatively Low, Spurring M&A

Activity

3.4%

3.9%

5.8%

-

3%

6%

9%

12%

15%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

AA Rating BBB Rating BB Rating

Cost of funding has remained relatively low since late 2012

21

What Are Key Criteria For High Quality Target?

Established market position & leadership

High-growth end-markets

Sustained financial profitability

Distinctive value proposition

Complimentary product / geographical portfolio

Technology leadership and innovation

Competitive cost position

Experienced management team

HSSE track record