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

Paint WarsICI’s Bid to buy Asian Paints India Ltd.

February 21, 2000Ankur Meattle

Rohit RathiBrad 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

• Economic Reforms• Major areas in 1991:

– Licensing– Privatization– Foreign Investment

• Corporate Governance Problem

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

• 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

• Not protected or priority sector• Two Strategic Groups

ORGANIZED SECTORLarge Companies

QualityHigher Cost Structures70% of Market Share

SMALL SCALELow O/h

30%

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

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

• 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

• $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

• Real Option Value• Expandability• Import Barriers• Management• Brand Name• Synergies

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

• 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

• 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

• 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

• 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)

Q&A