Serious issues of corp governance seen linked to merger deal
The stock of paint maker Akzo Nobel gained 10% on Thursday on news that opposition by minority shareholders could stall the proposed merger of the listed firm with three unlisted group companies. The rise has also been fuelled by indications that Akzo Nobel was planning to mop up shares from the market through a creeping acquisition. The stock had earlier fallen nearly 15% on the earnings dilutive merger proposal.
The Netherlands-based paint and specialty chemicals company has had a presence in India through its several unlisted subsidiaries. However, its acquisition of ICI in 2007-08 led to it controlling the promoter’s stake in the listed entity in India.
Even for someone who is not a finance whiz, it is clear that the acquisition of the three unlisted companies was being proposed at an unfairly high valuation. Since the aggregate net profit of these three companies was just Rs 24.7 crore, it worked out to a price-toearnings multiple of between 30 and 40 — which even the listed company has never commanded. Also, the consolidated net profit margin of the unlisted companies was merely 4.4% in FY11 compared to 14% for the listed company.
At the time of announcing this merger, the company also agreed to pay a royalty to the parent company at 1% of net sales, which will go up to 3% in the future. This would be a charge of close to 5-15% on the pre-tax profits of the company in the next few years. However, the exact benefits of this arrangement are not known. Both these developments raise serious concerns relating to corporate governance standards of the company.
Akzo Nobel has grown through a series of acquisitions over the past 3-4 years in various parts of the world. Last week, it completed the acquisition of a Chinese company — Boxing Oleochemicals — and then announced that it was acquiring the residual shares of Italian company Metlac, in which it owned a stake through ICI’s acquisition.
Whether the company will unveil an offer to buyback shares or delist its Indian arm is a matter of speculation. However, that may not be easy.
For one, a large chunk — 23.8% of the equity — is controlled by local institutional investors who appear to be in no mood to accept such an arrangement.
Secondly, its rival Asian Paints holds nearly 5.5% of this. It will be a tough task negotiating with these investors to settle for a deal that is palatable to everyone.
The Netherlands-based paint and specialty chemicals company has had a presence in India through its several unlisted subsidiaries. However, its acquisition of ICI in 2007-08 led to it controlling the promoter’s stake in the listed entity in India.
Even for someone who is not a finance whiz, it is clear that the acquisition of the three unlisted companies was being proposed at an unfairly high valuation. Since the aggregate net profit of these three companies was just Rs 24.7 crore, it worked out to a price-toearnings multiple of between 30 and 40 — which even the listed company has never commanded. Also, the consolidated net profit margin of the unlisted companies was merely 4.4% in FY11 compared to 14% for the listed company.
At the time of announcing this merger, the company also agreed to pay a royalty to the parent company at 1% of net sales, which will go up to 3% in the future. This would be a charge of close to 5-15% on the pre-tax profits of the company in the next few years. However, the exact benefits of this arrangement are not known. Both these developments raise serious concerns relating to corporate governance standards of the company.
Akzo Nobel has grown through a series of acquisitions over the past 3-4 years in various parts of the world. Last week, it completed the acquisition of a Chinese company — Boxing Oleochemicals — and then announced that it was acquiring the residual shares of Italian company Metlac, in which it owned a stake through ICI’s acquisition.
Whether the company will unveil an offer to buyback shares or delist its Indian arm is a matter of speculation. However, that may not be easy.
For one, a large chunk — 23.8% of the equity — is controlled by local institutional investors who appear to be in no mood to accept such an arrangement.
Secondly, its rival Asian Paints holds nearly 5.5% of this. It will be a tough task negotiating with these investors to settle for a deal that is palatable to everyone.
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