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Paint Wars ICI’s Bid to buy Asian Paints India Ltd. : 

Paint Wars ICI’s Bid to buy Asian Paints India Ltd. February 21, 2000 Ankur Meattle Rohit Rathi Brad Winer Wee Yee


Agenda Introduction The Environment The Players The Bid The Hold-up Options Conclusions


Introduction Setting Bombay, October 1997 Raj Purohit An associate’s dilemma Kotak Mahindra Capital Company The story Deal gone sour !

Investing in India: 

Investing in India Economic Reforms Major areas in 1991: Licensing Privatization Foreign Investment Corporate Governance Problem

Investing in India: 

Investing in India Uncertainty in Policy Changes since 1960 1960: Investment encouraged 1973: 40% limit placed on foreign ownership 1980: Modified 1991: Changed again to allow majority Add to this the dimension of industry and sectors

Investing in India: 

Investing in India Three Regulatory Bodies Foreign Investment Promotion Board Ministry of Industry - Policy Reserve Bank of India - Central Bank Latest Guidelines in Jan 97 “...an overseas corporate body can buy into or enlarge its holding .. only if the board of the domestic company allows it to.”

The Paint Industry: 

The Paint Industry Not protected or priority sector Two Strategic Groups ORGANIZED SECTOR Large Companies Quality Higher Cost Structures 70% of Market Share SMALL SCALE Low O/h 30%

Indian Paint Industry: 

Indian Paint Industry Industrial (30%, Rs. 6,442 MM) Automotive, Special Purpose, Marine etc. Decorative (70%, Rs. 15,033 MM) Interior Finishes Indian ratio will converge to World trend (50-50) in 10 years

Indian Paint Industry: 

Indian Paint Industry ORGANIZED SECTOR BY MARKET SHARE # 1 Asian Paints (33%) # 2 Goodlass Nerolac (18%) # 3 Berger Paints (14%) # 4 ICI India (11%) # 5 Jenson and Nicholson (6%) Total Market: Rs. 21,476 MM

Players - Asian Paints: 

Players - Asian Paints Rs. 6980 MM ($175MM), Rs. 378 per share on 8/1/97 Market leader with strengths in Distribution, Management, Decorative Paints Majority held by 4 promoters Chokseys 9.5% Danis, Vakils, and Chowksis 41.06% Public and Mutual Funds 28%

Players - ICI Plc., UK: 

Players - ICI Plc., UK $15 BN, Diversified, ICI India - Rs. 2,254 MM -- < 1/2 of Asian Paints Strengths Financial, Industrial Paints ICI India Paints 43% of sales - thrust area! ‘The 10 X Plan’

The Bid - Motivation: 

The Bid - Motivation Real Option Value Expandability Import Barriers Management Brand Name Synergies

The Bid - Valuation: 

The Bid - Valuation Naïve Method P/E and DCF Used Indian CAPM for WACC = 16.5% Value Rs. 346/share Problem Areas International WACC ~ 20 - 27% Value Rs. 220 - Rs 170/share

The Bid - Real Option: 

The Bid - Real Option Naïve Method P/E (23) regressed on Market Share New value calculated at P/E = 27 Option Value = (Forecasted - Current) Problem Areas P/E Method is faulty, Ignores discounting Probabilities of various failures of takeover or strategic alliances ignored

The Hold-Up: Nov 1, 1997: 

The Hold-Up: Nov 1, 1997 Asian Paints refuses to transfer shares, reasons provided FIBP Guidelines Sham Transaction “No Value Added to Investors” Stock price plummets to Rs. 280 per share KMCC sitting on losses

Options for KMCC : 

Options for KMCC Sell back to 3 promoters Negotiate with ICI, share/bear all losses (ICI has favorable contract) Appeal to FIPB, MoI Sell to 3rd party Sell to ICI India Combination

What Happened: 

What Happened Stock hit an all time low on 23rd June 1998 at Rs. 198 per share KMCC had to sell 4.5% to Unit Trust of India (mutual fund) and remaining back to the promoters at an average of Rs. 280. KMCC/ICI - UK bore huge losses Rs 245 MM (ICI Rs 140 MM, KMCC Rest)



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