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January 28, 2014

Kraton to merge with LCY Chemicals' styrenic block copolymer business

Mary Page Bailey

Kraton Performance Polymers, Inc. (Houston; www.kraton.com), a global producer of highly engineered polymers, has announced that it has entered into a definitive agreement to combine with the styrenic block copolymer ("SBC") operations of Taiwan-based LCY Chemical Corp.
 
The combination agreement calls for LCY to contribute its SBC business in exchange for newly issued shares in the combined company, such that Kraton's shareholders and LCY will each own 50% of the outstanding shares of the combined enterprise.  The combined company will be incorporated in the U.K., will be listed on the New York Stock Exchange, and will be led by Kevin M. Fogarty, Kraton's president and chief executive officer, and a global management team with administrative headquarters located in Houston.
 
"This combination addresses the strategic objectives of both Kraton and LCY.  For Kraton, it represents a logical next step in our ongoing strategy to reposition our manufacturing assets, providing for significant improvements in overall cost structure, and furthering our investments in Asia, thereby increasing our participation in the fast-growing markets of China, and Asia Pacific more generally.  Moreover, the combined company's capital structure, financial flexibility and cash-flow profile will serve as a strong foundation for continued investment in growth," said Kevin M. Fogarty, Kraton's President and Chief Executive Officer.  "Kraton is an innovation company and our commitment to innovation, including our ongoing portfolio shift, will continue as the combined company focuses on accelerating growth in both its innovation portfolio and its core product offerings." 
 
"LCY's SBC business, with its cost-effective operations and the strategic location of its manufacturing plants, including its recently expanded 300 kiloton plant in Huizhou, China, has generated growth rates exceeding twice the average of the SBC industry.  Operations of the combined company will benefit significantly from LCY's cost-effective process capabilities and strategic sourcing of raw materials in Asia," added Fogarty.  "We expect the combination to result in synergies of $65 million on a run-rate basis by 2017, which will be achieved through fixed-cost rationalization, optimization of variable-costs and through reductions in overhead costs.  We estimate we will incur costs totaling approximately $70 million in the next three years to achieve these synergies.  We also expect the combination to be accretive on an operating basis by $0.75 - $0.80 in the first full year of combined operations."
 
"Through the leadership of Bowei Lee, chairman and chief executive officer of LCY, LCY has established an impressive track record for profitable growth in its SBC operations.  We feel that LCY's market presence in Asia and the cost effectiveness of its manufacturing operations provide a strong complement to the innovation focus and portfolio breadth of Kraton," said Dan Smith, chairman of Kraton's board of directors.  "The combination of Kraton and LCY's SBC business will result in a company with extensive capabilities and will establish a platform for continued innovation and profitable growth that will benefit Kraton's shareholders, its customers and employees," Smith added.  "With one-third of pro forma revenues coming from China and greater Asia, the combined company will be geographically balanced across its three regions – the Americas, Europe and Asia – and well-positioned to serve customers around the world with an industry-leading platform of innovation-grade products." 
 
"The combination agreement between the parties addresses the strategic objectives for both LCY and Kraton and allows the combined company to develop and manufacture more innovative products for broader applications in a cost efficient manner.  The combination of LCY's innovative SBC manufacturing technology and geographic focus in higher growth markets with Kraton's leading R&D resources will make the new company a leading global player in SBC's.  Projected synergies are expected to be achieved within three years, creating significant value for the combined company, shareholders and employees, as well as continuing to promote Taiwan's petrochemical industry as an important force on the international stage," said Bowei Lee, Chairman and chief executive officer of LCY.
 
The new combined company will be a public limited company under the laws of England to enhance the financial flexibility of the global enterprise.  The combined company will establish a registered office in England, and will maintain administrative headquarters in Houston.  At the closing of the transaction, Kraton, as well as the entities owning LCY's SBC business will become subsidiaries of the combined company.  The current shareholders of Kraton will exchange their shares on a one-for-one basis for shares in the combined company.  At closing, Kraton's shareholders will own 50% of the shares of the combined company, and LCY will own the other 50%. 

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