INSIGHT: Akzo Nobel has lessons to learn from ICI

08 October 2007 15:53  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Akzo Nobel admits it can learn from ICI in the decorative paints business.

Some analysts have been suggesting as much as the Akzo Nobel board has sought to satisfy shareholders that its 670 pence a share €11.5bn (£8bn or $16.3bn) bid for ICI is value enhancing.

The UK group’s control of working capital is much better than Akzo Nobel's and it looks as though it has managed its leading paints brands better.

"We think there is a great team that has been managing ICI,” Akzo Nobel CEO Hans Wijers said at a press briefing on Monday as he talked about completing the ICI takeover by the end of the year.

“In some areas they are significantly better than we are… there are lessons to learn,” he said as he admitted that Akzo Nobel’s decoratives brand management had not been the best.

Akzo Nobel will become the world number one global coatings maker, should shareholders of both companies approve the match on 5 and 6 November and the competition authorities give their stamp of approval.

But it will need to perform in a business that is consolidating fast.

The Netherlands based coatings and chemicals group on Monday offered further inceptives to sweeten the deal.

Wijers and his team are trying to persuade Akzo Nobel shareholders, among them hedge funds that are not too likely to be interested in longer-term aims and goals, that with ICI Akzo Nobel can greatly improve its decorative coatings business and tap into growth in key markets in places like China and Latin America.

Thought by some to be overpaying for the ICI assets, Wijers has been stressing the relative lack of cyclicality in paints, its tie-in with GDP and the benefits owning a strongly performing decorative coatings maker can bring.

There is little doubt that Akzo Nobel can benefit from owning ICI, if the positive differences between the two businesses can be captured.

The two operations complement one another in geographic terms. There is some brand overlap, particular in the UK, but Wijers says that talks with the European Commission have been "constructive".

The greatest issue now, as Akzo Nobel conducts a four-day series of investor roadshows in London and New York, is the impact of the home building market slump on US paints prospects.

Industrial coating maker Valspar last week issued a warning that its fourth-quarter earnings would be hit by the slip over of troubles in housing to the industrial sector. Akzo Nobel currently makes primarily industrial coatings.

Wijers on Monday said he believed the US market downturn would last for one or two years but that a combined Akzo Nobel and ICI with a more widespread portfolio would be better placed to weather geographical risks.

The ICI deal indeed is all about opening up the portfolio to new opportunities in decorative paints and providing a much broader geographical spread.

Combining ICI’s paints business with Akzo Nobel’s decorative coatings operations will produce a division with sales of about €5.4bn.

Akzo Nobel had coatings segment sales in 2006 of €6.2bn including decorative sales of €2.3bn.

The Netherlands based group has worked hard in the past few years ‘fixing’ coatings, chemicals and pharma although decorative coatings seems to have missed out in the performance transformation.

Akzo Nobel on Monday said its decorative coatings sales grew 13% in the first half of 2007 but did not provide earnings data. Earnings before interest, tax, depreciation and amortisation (EBITDA) for the coatings segment were up 11%.

Its synergy and performance aims for coatings, learning from the ICI experience, perhaps, will have to help drive the broader goal of an EBITDA margin in the upper half of its chemicals and coatings sector peer group.

This year, that margin is estimated to be around 13.9%.

Last year, Akzo Nobel’s group-wide EBITDA performance was 12.7%.

By: Nigel Davis
+44 20 8652 3214

< previous article(ICIS Chemical Business podcast November 2, 2009)

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly