INSIGHT: Akzo Nobel must move fast for ICI gains

06 November 2007 16:10  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Akzo Nobel shareholders said yes then ICI's followed suit, although there were some strong objections and pointed comments about squandered industrial might.

The marriage of two of the world’s largest paints and coating makers is set to go ahead and with it send into oblivion the vestiges of one of the world’s foremost chemicals players.

However, it makes sense whether you view Akzo Nobel’s acquisition of ICI - and the hiving off of the adhesives business to Henkel – as a defensive move or one that provides a platform for further growth.

ICI will make Akzo Nobel the world’s second largest paints maker after Sherwin Williams.

It gives the Netherlands-based coatings and chemicals producer important paints brands and important decorative coatings footholds in fast growing markets in Asia, including China, and South America.

The biggest bugbear for Akzo Nobel in the near term is likely to prove to be North America, where fallout from the subprime mortgage fiasco has hit new home construction.

ICI has worked hard on its US business but its Glidden brand sales have suffered.

In the current environment, they will continue to do so.

Akzo Nobel understands that, in this market, it will have to sit tight, but the question has to be - for how long?

It says that teams will be in place to implement the ICI integration and develop planned synergies once the deal is in place.

Intriguingly, it looks as though ICI can teach the Dutch player a thing or two about how to run a decorative paints business. Akzo Nobel thought it was an accounting anomaly but realises now that the UK-based company manages working capital in its paints operations better.

So there are operational lessons to be learned alongside the not-inconsiderable synergy potential of putting these two major coatings players together.

Akzo Nobel eyes the ongoing consolidation in the sector. It has been in a position to do something about it.

ICI on the other hand has suffered from the legacy of a string of management and strategic errors.

Once at the forefront of chemicals manufacture, the company has been buffeted by the winds of change and in hindsight was not allowed to ride with them. Had it done so it might still be intact.

ICI’s technology, market presence and brand management, however, still stand out and, as the deal has demonstrated, have real value.

Akzo Nobel should know all about managing mergers and acquisition. It was created by merger, as indeed was ICI many years ago.

The more recent merger with Nobel, the acquisition of Courtaulds and the fibres spin-off helped create the portfolio in place today.

The new Akzo Nobel portfolio promises a great deal. On Tuesday details of a new top management structure should be revealed.

Akzo Nobel has struck a sweet deal with Henkel to sell on the ICI adhesives and electronic materials businesses for €4bn. That should be closed within 10 months of the completion of the ICI takeover which, given regulatory approval, should be done by January.

The Henkel sale removes a potential portfolio headache. It has reduced the earnings multiple for the ICI takeover from 8.2 times to 7.8 times, according to the Akzo Nobel numbers.

The break-up of ICI was expected once the group’s pension problems eased and the sale of the former flavours and fragrances business Quest was agreed.

The chemical industry, not just the coatings sector, is consolidating fast. Given the number and size of such transactions, this will prove to be a landmark year for an industry in transition.

Akzo Nobel just has to make decorative paints work. That may be no small task.

The company has streamlined and consolidated in chemicals. It has lifted efficiencies in industrial coatings. It now has to do the same in the decorative businesses.

Akzo Nobel cannot simply rely on ICI growth and the potential in important new markets. It has to address synergies and performance in Europe and North America where the businesses can be expected to be under increasing pressure from possibly slower economic growth and diminished consumer spending power.

It will not be plain sailing with ICI. The new and old businesses have to be welded together fast.

By: Nigel Davis
+44 20 8652 3214

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