Imperial Chemical Industries Plc (ICI), the UK maker of Dulux and Glidden paints, rejected a ?7.2 billion (US$14.2 billion) bid from Akzo Nobel NV of the Netherlands as too low.
Akzo, the world's largest maker of paints and coatings, offered ?6 for each share of London-based ICI, the UK company said in a statement yesterday. That's 9.3 percent more than Friday's closing price.
ICI said the approach "significantly undervalues" the business.
ICI stock had its biggest gain in almost four years and rose as high as ?6.37 after Akzo, based in Arnhem, said it would continue to "evaluate" the company. Buying ICI would give Akzo the second-biggest paint maker in the US and China and boost its bargaining power with raw material suppliers.
"ICI is the best target for Akzo and nobody will be able to match them on price because of the cost and operations synergies they will get out of it," said James Knight, an analyst at Collins Stewart in London, with a "hold" rating on ICI. "I can't see this not happening."
Shares of ICI jumped 16 percent or ?8.85 and traded at ?6.35 as of 8:25am, showing investors expect a sweetened offer. Yesterday's rise, which boosted ICI's market value by ?1 billion to ?7.59 billion, was the biggest since July 31, 2003. Shares of Akzo had fallen almost 1 percent to 61.01 euros (US$81.3), giving a value of 17.7 billion euros.
The company has enough cash to purchase any rival after agreeing in March to sell a drugs unit for US$14.4 billion, Merrill Lynch & Co analyst Fraser Hill said this month.
Sales in the US$83 billion global coatings industry are expected to accelerate through 2010, driven by as much as 10 percent growth in Eastern Europe, Asia and Latin America, Merrill Lynch said.
ICI sold its Quest flavorings unit for US$2.3 billion in November, leaving both companies in a position to target competitors while making them more vulnerable to bids.
Joining Akzo and ICI would create a "coatings behemoth" better placed to target growth markets such as Asia and delivering annual savings of as much as 290 million euros, Knight said on Feb. 6.
ICI has been repeatedly touted as a takeover target after it sold units to halve debt and cut its pension deficit. Other possible suitors cited by analysts have included Dow Chemical Co, the largest US chemical maker, Reliance Industries Ltd, India's biggest company by market value, and private-equity firms.
Akzo Nobel lags behind peers in the coatings industry in terms of profitability and management may announce additional cost cuts before the end of the year. Chief executive officer Hans Wijers already plans 100 million euros in savings in a program to be delivered by 2009. Merrill Lynch estimates the Dutch company has the potential for a further 174 million euros in cuts.
"ICI would represent a highly attractive addition to its focused coatings and chemicals business," Akzo said in a statement. "A further announcement will be made if appropriate."
CEO John McAdam has focused ICI on household paints, coatings and varnishes, which now account for 48 percent of revenue. Its National Starch division, which provided more than 40 percent of sales last year, supplies ingredients to food manufacturers to improve the texture and shelf life of yogurts and ice cream. Its starches are also used to strengthen glue and paper.
ICI was formed in 1926 when four British chemical companies merged. It made 100 acquisitions through 1987 and spun off its pharmaceutical and agricultural operations as Zeneca in 1993.
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