FOCUS: ICI can go for growth after Quest disposal

23 November 2006 17:45  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The bump upwards in ICI’s share price following announcement of the sale of its Quest flavours and fragrances business to Switzerland’s Givaudan was largely based on the positive financial aspects of the deal.

The shares rose 9% in the first few hours of trading in London on Wednesday and on 23 November were 16% higher than before the disposal at 448 pence.

Underlying the further shift in the now paints, adhesives and specialty starches maker’s portfolio is a story of potential global growth.

ICI operates in still highly fragmented markets. The opportunities for further acquisition-led growth are clear.

It was on-going market consolidation that drove Givaudan to approach ICI about Quest only some two weeks ago.

ICI’s chief financial officer Alan Brown admitted in a conference call on Wednesday (22 November) that his company had grasped the opportunity of a £1.2bn ($1.5bn) deal that valued the business at more than 15 times earnings before interest, tax, depreciation and amortisation (EBITDA).

This is one of the highest multiples paid for a flavours and fragrances business and probably reflects Givaudan’s belief that the Quest restructuring was continuing apace.

The Quest business fell foul of the disastrous implementation of a warehouse IT (information technology) system at the flavours business in Naarden in the Netherlands in 2003. It is still in recovery mode following that debacle which ultimately prompted the departure of ICI’s chief executive at the time, Brendan O’Neil.

There can be little doubt that Givaudan thinks Quest is a good business.

Givaudan was an industry leader before the acquisition but Quest adds further market and regional strength. ICI was number four in flavours and fragrances with a business that, although it was often talked about, represented in 2005 only 10% of group sales.

ICI can put the money made on the business to good use.

Brown said that from the £1.2bn gross proceeds £230m would be used to top up ICI’s pension fund and £70m go to tax and other costs. Some £900m in net proceeds would be used to eliminate net debt and take the group into a positive cash position.

Remember in the late 1990s following its transformation from a hybrid into a specialty chemicals group ICI had a net debt of more than £4bn.

"The sale of Quest represents another major step towards realigning ICI," chief executive John McAdam said on 22 November.

“The disposal proceeds will allow us to accelerate our investments in our strong coatings, adhesives and other specialty chemicals businesses to deliver higher levels of profitable growth," he added.

Following the Quest disposal, ICI can focus resources more effectively on the other businesses it want to grow aggressively and on high growth regions such as Asia and Latin America.

Brown pointed out that ICI currently is number two in paints and roughly number one or number two in the highly fragmented adhesives market. In its niche specialty starches business it claims to be global number one.

But in paints and adhesives it only has about 9% global market share, Brown added.

Given its newly found financial resources it can take a leadership position in these industries. It will be looking for numerous "bolt on" acquisitions, largely in developing markets. These are not easy deals to do but they are important as both the decorative paints segment and adhesives become more global.

Grasping the opportunity with Quest focuses ICI further and has led some to talk of further break up of the group. A cash rich and more focused company however, can also play better to its strengths.

ICI will be expected to demonstrate that over the coming quarters.

By: Nigel Davis
+44 20 8652 3214

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