Europe Reports

Major M&A activity on the horizon

By Sean Milmo | April 3, 2007

With robust sales and increased profits last year, major paint firms are poised for lots of activity on the M&A front in 2007.

Some of Europe's leading coatings companies are on the acquisition trail after reporting relatively strong rises in sales and profits last year and gathering surplus cash for takeovers.

The most active predator in 2007 is likely to be Akzo Nobel, which later this year will have funds for acquisitions following the 11 billion ($14 billion) sale of its Organon BioSciences pharmaceuticals operation to Schering-Plough Corp. Akzo said it wants to use the proceeds from the divestment to grow its coatings and chemical businesses.

Analysts reckon that the prime target for a takeover by Akzo will be ICI which itself has money available for acquisitions following the sales for a total of 1.6 billion ($3.1 billion) of Uniqema, its oleochemicals and surfactants activity, and Quest International, its fragrances and flavors business.

There has even been speculation that BASF, the world's largest chemicals company with a large automobile and industrial coatings operation, might make an audacious bid to acquire Akzo. Such a move would broaden BASF's sales in decorative paints in which it has a presence only in the South American market.

Kemira, whose Tikkurila coatings subsidiary has been busily taking over paint companies in Russia and elsewhere in Eastern Europe over the past year, said it will continue its M&A expansion in its main businesses of coatings and water and paper chemicals.

Jotun of Norway, which had a record year for sales in 2006, is one of the few larger European coatings players to make clear that it is not interested in acquisitions. "For many years Jotun has grown organically and this is the strategy we will continue with," said Morten Fon, the company's president and chief executive. "To achieve our goals we will build new factories and invest in existing facilities. We will also strengthen our investment in research and development."

For companies with a cash pile like that shortly to be gained by Akzo Nobel, acquisitions are virtually the only option. Once it has closed its deal with Schering-Plough in the second half of the year, it will be under pressure to make a takeover bid comparatively quickly. Otherwise analysts are predicting it will itself be an acquisition target for equity funds attracted by its large surplus of money.

Akzo said that after the sale it will spend approximately 1.3 billion on a share buyback and also reduce its pension and to clear outstanding debts, which could cost another 3 billion. Over 6 billion could then be left for "delivering on its growth ambitions."

Hans Wijers, Akzo's chief executive, told journalists in March that the company would be looking at all targets which "make strategic sense." He did not directly rule out a possible bid for ICI, which has been rumored in recent years to have been stalked by equity funds.

Analysts believe that, in addition to ICI, Akzo will be investigating the possible acquisition of Sherwin-Williams, whose market capitalization has been close to $9 billion, and Valspar, which has been valued at $2.5-3 billion.

ICI, which has a market capitalization of 5.5-6 billion ($10.7-11.6 billion), is considered to be the biggest attraction to Akzo because a merger with the UK company-now comprising mainly its paints and National Starch operations-would boost both its coatings and chemicals activities. Half of National Starch's sales of 2 billion consist of adhesives, a quarter specialty starches and the remainder specialty polymers and electronic materials.

Last year ICI's total sales rose six percent to 4.8 billion while earnings before interest, tax, depreciation and amortization (EBITDA) were flat at 730 million. Approximately a third each of group sales were in Europe and North America, 27% in Asia and most of the remainder in Latin America.

Paint sales, 92% of which are decorative, went up five percent to 2.4 billion while trading or operating profit increased by two percent to 257 million, equivalent to a sales margin of 11%.

In decorative paints, ICI has been having problems with its mature markets of North America and Europe. North American sales went up by only one percent in 2006 while in the fourth quarter they dropped four percent due to a weaker U.S. housing market. In Europe sales have been stronger with sales soaring by 18% in the fourth quarter in continental Europe but, as in North America, margins in Europe have been squeezed by higher raw material costs.

The growth region in coatings for ICI is Asia, where decorative paint sales rose by 16% last year. In the fourth quarter they rocketed by 19% after benefiting from a marketing drive in China's second and third tier ranking cities.

Akzo, which is less dependent on the decorative sector in paints, pushed up its coatings sales by 12% to 6.2 billion last year. While sales of decorative paints, which at 2.2 billion accounted for 37% of coatings revenue, and those of industrial activities both increased by 12%, marine and protective coatings sales went up by 16%.

Operating profits in coatings jumped by 57% to 604 million, equivalent to a ten percent margin. Return on invested capital in the business rose by 18% to 25%.

Like with ICI, the company is having difficulties with profitability in decorative paints in mature markets such as Western Europe where margins have been narrowed by price pressures.

Although Akzo and ICI have large decorative paints operations, particularly in Europe, analysts are predicting that a merger of the companies would not confront major anti-trust hurdles. Akzo may be forced only to sell its Crown decorative paints operation in the UK in which it is a big competitor to ICI's Dulux brand.

Both companies currently have similar objectives in the international decorative market. Akzo has recently merged its decorative activities into a single worldwide operation to give it more marketing clout. But it lacks a heavyweight global brand like ICI's Dulux.

ICI is also looking to improve its market leadership positions in decorative paints. In Europe it is number one only in the UK and Ireland and in Asia only in Malaysia, Pakistan and Sri Lanka.

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