INSIGHT: All eyes on takeover target ICI

07 February 2007 16:49  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The release of ICI’s fourth quarter and full year results on Thursday will be overshadowed by continued speculation on whether Akzo Nobel is prepared to consider a bid for the paints and starch specialties group.

Having sold it flavours and fragrances business Quest to Switzerland’s Givaudan last year, ICI has become an attractive takeover target.

On its part, Akzo Nobel is expected to build up a decent war chest following transformation plans which involve the spin off of its Organon Biosciences human and animal healthcare business.

An initial public offering (IPO) of 20-30% of Organon Bioscience shares, worth an estimated €9bn ($12bn) is on the cards but the spin off, or parts of it, could still be sold. What Akzo Nobel uses the proceeds for currently is anyone’s guess.

The prospect of a bid has driven ICI’s shares up to their highest level since 2000 and the stock shows little sign of slipping back. Analysts admire current management and its approach to cost cutting and portfolio realignment.

At the same time the group’s remaining businesses – paints and National Starch appear to be doing well.

Paints in North America have understandably been under pressure and in the third quarter reported sales down 4% with retail sales off 12%. ICI’s rivals in the US showed a relatively strong Q4 on a year-to-year basis but were hit in the second half.

ICI’s Q3 paints profits were up 6% driven by Asia and Latin America.

Marketing in the UK and Republic of Ireland paid off in higher profits although continental Europe profits were lower. Strong sales growth for adhesives and specialty starches helped drive improved profits for National Starch.

ICI is an attractive business in its current form given the opportunities for add-on acquisition driven as well as organic growth. Decorative paints growth in developed world markets is not spectacular but there are opportunities in Asia and Latin America.

Given the proceeds from the Quest sale ICI is all but debt free and should be able to pursue bolt-on buys in paints in all markets. These can be notoriously difficult to compete, however.

The international paints markets remains highly fragmented with many small, privately owned players. ICI will also want to row further in specialty adhesives.

Transformation of the business continues not only in a portfolio sense but also on the cost front. A strategic update is awaited.

Financial analysts particularly are enamoured by management’s approach to cultural change and to developing technology which they say should underpin higher profits from both Paints and National Starch.

Although likely to be overshadowed by speculation, the details of what ICI plans to do next will bear some scrutiny. The company may be smaller following divestments in 2006 – the oils and fats business Uniqema was sold to Croda earlier in the year – but it still has a long way to go.

ICI's shares traded at 472.50 pence on Wednesday at 15:40 GMT, 32.7% higher than a year ago.

By: Nigel Davis
+44 20 8652 3214

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