Akzo Nobel last month (June) took the first cautious st EPS to a takeover of ICI, which would create a global leader in coatings with a share of 14%-three times higher than that of the second largest coatings company worldwide, PPG Industries.
The Dutch company, already the world's biggest paint and coatings producer in terms of sales, made an unofficial offer of 600 pence ($11.88) per ICI share, equivalent to a total valuation of Ł7.2 billion of the UK-based coatings and specialty chemicals producer. The offer was quickly rejected by the ICI board.
However, Akzo Nobel indicated in a statement on June 18 that it wants to take its time with the bid. It has merely "approached the board of ICI with a view to entering into discussions about a possible cash offer." Furthermore it stressed that there was "no certainty that any further proposal" would be made to ICI.
Analysts believe that Akzo Nobel will have to raise its bid to at least 650 pence and maybe in excess of 700, which would bring the multiple on the price to over 12 times profits. This would be in line with what has been paid in recent large takeovers in the global chemicals sector.
A successful offer may have to be as high as 750 pence if ICI attracts rival bids, with BASF thought to be a possible contender. Some commentators have even speculated about the possibility of a counter-bid by ICI for Akzo Nobel.
After the sale of its Organon BioSciences pharmaceuticals operation earlier this year, Akzo Nobel has ready cash of over €6 billion ($8 billion) for an acquisition. But it is thought likely to want to avoid a takeover battle.
"It will not want to force a deal which is opposed by the ICI board," said Louis McCulloch, a coatings consultant at James Consulting, Dorking, England. "Contested bids are not Akzo Nobel's style. It will want to win over the ICI management. So it will not be in a hurry. Any discussions between the two companies may rumble on for a quite a while."
For the moment ICI's management has been making clear it wants the company to stay independent by pursuing its own growth and acquisition strategies. Some of its larger shareholders are supporting this stance.
John McAdam, ICI's chief executive, took the opportunity to outline a vision for the company at a meeting on June 20 with financial analysts in London on National Starch, which accounts for 41% of company sales against ICI Paints' 50%.
McAdam said that the company's objective was to be a leader in formulation science. Formulation expertise is a common technological theme in ICI's six main businesses-decorative paints (45% of total sales last year of Ł4.8 billion), can coatings (five percent) and National Starch's four activities in adhesives, electronic materials, specialty polymers and specialty starch.
Graeme Armstrong, senior vice president, technology, told the meeting that in addition to the two paint operations, National Starch's four businesses all provide products with coating functionalities. The other two main functionalities within the group are bonding through products like fillers and adhesives and structure with compounds such as structural adhesives, concrete additives and texturizing agents.
Akzo Nobel has been criticized by analysts for not making clear how it intends to exploit synergies between its coatings and chemicals operations. Coatings sales last year totalled €6.2 billion, accounting for approximately 60% of its total operation with the remainder comprising chemicals. It is a leading supplier of chemicals for polymer production and processing industries and for pulp bleaching chemicals, while it also produces a range of functional chemicals and surfactants.
"Obviously the company's primary objective in taking over ICI is to get bigger in coatings, especially decorative paints," said one London-based analyst. "It is uncertain what its interest is in National Starch. The attraction could be National Starch's adhesive operation which is among the top five in the world and in which there are technological synergies with coatings."
In the global paints sector in which ICI has a six percent share against Akzo Nobel's eight percent, the appeal of ICI to Akzo Nobel is the UK company's broad geographical spread and the power of its international Dulux brand in many regions.
An acquisition of ICI would give Akzo Nobel a much stronger presence in the architectural market in North America through ICI's Glidden brand. ICI is also active across Latin America which takes up eight percent of its paint sales.
It has also been achieving fast growth in Asia Pacific despite being forced to sell its Australasian coatings activity in the late 1990s to reduce its debt and a subsequent failure to gain a share in Asia Paints, the market leader in India.
For Akzo Nobel, ICI has the massive advantage of being a leading player in China's decorative market, where it is number two behind Nippon Paint of Japan. The Dutch company, which is still a comparatively small player in Chinese decorative paints, has recently declared its ambition to be among the top three in the sector by 2011.
Ironically one of ICI's weakest positions in the major decorative markets is in Western Europe where a large proportion of its sales are concentrated in the UK. Since Akzo Nobel also has a big share of UK decorative coatings sales through its Crown Berger range of paints, it will almost certainly have to sell a sizeable chunk of any merged operation in the country in order for an acquisition to comply with anti-trust regulations.
"The UK appears to be the only market where a takeover by Akzo Nobel would lead to competition complications," said Rob Peacock, a coatings analyst at London-based Business Research Group.
In a report just published on the Western European paints market, Business Research's IRL research unit estimates that between them ICI, Akzo Nobel and SigmaKalon account for 85-90% of decorative paint sales in the UK.
"The need for Akzo Nobel to sell a big proportion of its newly enlarged business in the UK could be a big opportunity for a non-European paint company, possibly in the U.S., to gain a large presence in the UK and thus an entry into the Western European market," said Peacock.