Paint Wars ICIs Bid to buy Asian Paints India Ltd.

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Paint Wars ICIs Bid to buy Asian Paints India Ltd.

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Na ve Method. P/E and DCF. Used Indian CAPM for WACC = 16.5% Value Rs. ... Na ve Method. P/E (23) regressed on Market Share. New value calculated at P/E = 27 ... – PowerPoint PPT presentation

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Title: Paint Wars ICIs Bid to buy Asian Paints India Ltd.


1
Paint WarsICIs Bid to buy Asian Paints India
Ltd.
  • February 21, 2000
  • Ankur Meattle
  • Rohit Rathi
  • Brad Winer
  • Wee Yee

2
Agenda
  • Introduction
  • The Environment
  • The Players
  • The Bid
  • The Hold-up
  • Options
  • Conclusions

3
Introduction
  • Setting
  • Bombay, October 1997
  • Raj Purohit
  • An associates dilemma
  • Kotak Mahindra Capital Company
  • The story
  • Deal gone sour !

4
Investing in India
  • Economic Reforms
  • Major areas in 1991
  • Licensing
  • Privatization
  • Foreign Investment
  • Corporate Governance Problem

5
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

6
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.

7
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
8
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

9
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

10
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

11
Players - ICI Plc., UK
  • 15 BN, Diversified, ICI India - Rs. 2,254 MM --
    lt 1/2 of Asian Paints
  • Strengths
  • Financial, Industrial Paints
  • ICI India
  • Paints 43 of sales - thrust area!
  • The 10 X Plan

12
The Bid - Motivation
  • Real Option Value
  • Expandability
  • Import Barriers
  • Management
  • Brand Name
  • Synergies

13
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

14
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

15
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

16
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

17
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)

18
QA
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