INSIGHT: ICI's stock climbs on likely Dow synergies

04 April 2007 13:23  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS  news)--ICI’s shares were buoyed further on the London Stock Exchange on Wednesday as bid speculation refused to fade with Dow Chemical, Reliance Industries and DuPont put in the frame for a possible approach.

ICI is much hotter property following the disposal in 2006 of its flavours and fragrances business Quest. More importantly, the on-going businesses are in attractive sectors from a global growth perspective.

Management has driven profitability up, debt is down and the group’s pension problems have waned. More streamlining is expected to help deliver stronger profits growth.

Currently it is not known whether any of the companies may be prodded into a bidding war for the UK based coatings and specialty starches group but interest has peaked.

Dutch coatings and chemicals group Akzo Nobel has been widely seen as ICI’s most likely suitor.

The structural fit in coatings looks good, although there would be some overlap, and Akzo Nobel has just sold its Organon Biosciences business to Schering-Plough for a cool €11bn ($14.5bn).

On the other hand, industry watchers have been waiting for some move from Dow Chemical, whether it is in petrochemicals, including commodity styrenics or polypropylene, or in a more market-facing business.

Chief executive Andrew Liveris in late January suggested that a styrenics deal was not far off and that the chemicals giant wanted to create more market-facing business platforms.

Dow was prepared to spend up to $10bn on the right deal, he suggested later, given the right price profile and synergies.

The Dow model is to pursue ‘asset-light’ ventures for its commodities businesses and look for further market focused opportunities.

It has such ‘market-facing’ platforms for the automobile industry, in construction, agriculture and water management.

A new unit is being put together in coatings based on amine and polyurethane chemistry and it wants to target the footwear sector.

Dow last year bought Bayer’s Wolff Walsrode cellulosics business to help lift sales from water soluble polymers to about $1bn a year. The adhesives business of ICI’s National Starch historically has driven National Starch's expansion.

The fit of ICI and Dow looks good on paper which satisfies one critical set of criteria, but does it satisfy the other?

Traders have talked of a deal value of 610 pence a share or £8.3bn ($16.3bn) including debt.

At first sight it is questionable whether Dow would be prepared to pay such a bid premium - ICI’s shares were at 547.50 pence at 12:10 GMT on Wednesday having hit an earlier high of 561.25 pence, up 8.6% since Friday’s close and 62% over the past year.

If Dow had been interested in ICI it surely would have made a move earlier.

Given current interest in the stock, however, the ICI shareholder is in a good place at a good time.

If Dow is interested in ICI it just has to make the price profile work.

($1 = £0.51 = €0.75)

By: Nigel Davis
+44 20 8652 3214

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