INSIGHT: Akzo Nobel and ICI - it's time to tango

18 June 2007 16:02  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--ICI is attractive because its decorative paints business is growing in markets that matter.

Consolidation in the fragmented coatings sector is widely expected but growing with small, bolt-on acquisitions is time-consuming and difficult. Acquiring a highly attractive set of coatings assets at the right price is a goal worth pursuing.

Akzo Nobel has taken its time since the announced €11bn sale of its life sciences businesses, Organon Bioscences, but its move on ICI was widely expected.

The 600p bid, valuing the UK-based maker of paints and specialty starches at £7.2bn (€10.7bn) carried a 9% premium on ICI’s closing price on Friday, but some analysts believe the Netherlands-based group can go further.

ICI’s paints growth in China and in Brazil has been impressive. The company also has been doing the right thing in the US where it runs up face-to-face with the big US paint makers and the giant retail outlets.

It has its well known brands Dulux and Glidden. Akzo Nobel sells into the decorative market with the brands Crown and Sikkens.

ICI could do a lot for Akzo Nobel and everyone knows it. The question really is can the Dutch group find the right price?

ICI’s management has done a great job over the past two years raising the quality – and lowering the cost – of support functions and, all importantly, focusing across the business on innovation and corporate culture.

These things matter and have been core to the group’s turnaround story.

The divestment last year of Quest produced a slimmed down and fit for purpose company but one which looked vulnerable.

Analysts’ valuations of the group have increased with the turnaround and as the debt burden and the company’s pension liabilities have been eased. A maximum bid price of 650p now looks most likely. Any higher and questions will be asked about the true value of a potential deal.

The Akzo Nobel move is further indication of the strong desire for consolidation in coatings.

Akzo Nobel is largely an industrial coatings business. It has been streamlined, slimmed down and driven harder than ever before.

A possible deal with Akzo Nobel would be enhanced by significant synergistic savings that Citigroup on Monday estimated at close to €200m.

A point made also by the analysts is that each company could bid for the other. Akzo Nobel is in the stronger position financially but ICI could gather the firepower to bid for Akzo Nobel.

The two firms are generating cash and each is in a relatively strong financial position making them vulnerable possibly not simply to each other.

Having made its move, however, it is unlikely that Akzo Nobel would not want to go further. If a bidding war for ICI ensues with other companies or private equity involved the bid price could move higher.

($1 = €0.75/£0.51)

By: Nigel Davis
+44 20 8652 3214

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