INSIGHT: Akzo Nobel can win on paints growth

04 March 2008 17:31  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Before Akzo Nobel finally won its £8bn ($15.9bn) bid for ICI it looked as though the Dutch coatings and chemicals firm could benefit strongly from the deal.

In decorative paints there seemed to be real differences in the way the businesses were run, with the ICI operations in the UK particularly performing much more strongly than their Akzo Nobel counterparts.

It remains to be seen what synergies Akzo Nobel can ultimately gain from absorbing ICI but there appears to be a great deal of upside potential.

Akzo Nobel has acquired a strong business with real growth prospects in decorative paints markets in Asia and Latin America.

It has to sell its own UK-based decorative paints operations and businesses in Belgium and Canada but the company is widely expected to benefit from ICI’s apparent ability to capture above average growth in some parts of Asia.

And ICI can teach Akzo Nobel a thing or two about brand, inventory and working capital management. The former UK-based company had to learn some hard lessons in the paints business on all three fronts in the US in the early years of this decade.

Analysts at Dutch bank ING this week said that upgrading Akzo Nobel’s decorative coatings margins to those of ICI Paints (based on 2006 results) could triple its margins in the segment by adding €180m to EBIT (earnings before interest and tax).

In decorative coatings, the deal with ICI has been acknowledged as something like a reverse takeover.

Akzo Nobel will divest ICI’s National Starch adhesives and electronic materials businesses to Henkel this year. It is also expected to sell its newly acquired speciality starches operations.

Akzo Nobel’s chemicals businesses are hardly affected by the ICI deal. But following not-insignificant restructuring the reduced portfolio has been delivering stronger results, albeit at the top of the chemicals cycle.

The focus on the firm’s fourth-quarter and annual results announcement this week will be on the latest takeover and what it means in terms of growth and enhanced shareholder returns.

Akzo Nobel faced shareholder opposition as it bid higher for the UK-based speciality chemical company but the deal now is being more broadly welcomed.

ING, however, believes that the market is missing the potentially important factor that ICI’s decorative paints coatings business has been better managed than Akzo Nobel’s.

Couple that with the stronger growth prospects for the combined businesses, and Akzo Nobel has the potential to beat performance expectations.

By the end of 2009 the company should be in a position to borrow around €3bn to fund further acquisitions or help return more cash to shareholders, ING says.

The bank is not alone in being upbeat on the company - which it says in a note to clients stands “at an unsustainably large discount to fair value”. A great deal is expected from the firm, which last year also sold its drugs business Organon to Schering.

Performance this year rests squarely on the speed at which the ICI decorative paints businesses can be integrated and the timing of the disposal to Henkel. Both the decorative and industrial coatings sector will be under pressure as global growth slows.

In January, Akzo Nobel told investors to expect a 2007 EBIT of about €900m (€1.36bn) on 2% sales growth.

($1 = £0.50/€0.66)

ICIS Copyright © Reed Business Information 2009

Author: Nigel Davis
+44 20 8652 3214

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