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