Imperial Chemical Industries

The acquisition trail

Specialty coatings, adhesives and paints group, Imperial Chemical Industries currently finds itself in the midst of whirling takeover speculation. Not content with acquisition aspirations of its own, the company is itself a target following several high profile disposals. A sound operational and financial performance in 2006 has done nothing to dispel would be suitors.

Last year, comparable group sales and trading profits were ahead 6 and 5 percent respectively. Trading margins were stable at 10.4 percent while the group's return on capital employed increased 170 basis points to 18.3 percent. While not the surging type of performance we have seen in the gold and energy sectors, the performance is a resilient one.

This is due to the challenges ICI is facing in some markets, in particular America, as well as general increases in raw material costs. In response, management is focusing investment on growth initiatives in high potential products and regions. Meanwhile, more mature 'cash cows' are reorganised to optimise operational effectiveness.

The most significant cloud on ICI's horizon is without question the Paints business in America. While last year's results at the group level was satisfactory, with several areas of exceptional performance, there could be no disguising the impact of the slowing US housing market.

Speculation of a takeover of ICI really began following the recent disposal of the Fragrances and Flavours business, Quest for £1.2 billion to Givaudan. Although the proceeds from the sale significantly reduce the historic pensions deficit and debt burden, providing ICI with the firepower for its own acquisitions, attention has focussed on ICI being the prey.

Dutch competitor Akzo Nobel's sale last month of its own Organon BioSciences division for £7.5 million has fanned the flames further. Claiming to prioritise debt repayment and pension deficit reduction as well, Akzo Nobel has made no secret of its desire to make a major acquisition to strengthen its coatings and chemicals business. ICI would appear to be a good fit with the exception of a UK paints division which could be spun off.

The merger and acquisition market is notoriously difficult to gauge. That said we believe ICI will be involved one way or another this year. With a war chest of its own the likelihood of a purchase by the group is as probable as a takeover. In either case, shareholders are in a good position.

Clearly a takeover would involve an immediate premium which would crystallise some medium to long-term value today. On the other hand, the slimmed down ICI with its turnaround days behind it can look confidently to the future. The combination of investing in growth whilst maintaining profitability in mature businesses, thus far is proving to be a winning strategy.