Mergers & Acquisition

Course Code: M&A-5

Assignment/Project Title : Asian Paints & Akzo Nobel M&A Proposal

Group Name: AOL_TIME WARNER

Submitted on: 31/12/2016

Group Members' contribution to this Project
Sl.
No. Student ID Student Name Contribution %
1 Gouri Sreekumar F15022 25%
2 Joshua Joseph F15029 25%
Pachva Ashok
3 Kumar F15046 25%
4 Sumith S F15117 25%

Total 100%
 & A k z o
Pa in t s
As i a n
N o b e l
op osal
Pr
M&A
Industry Introduction

Improved economic growth and lower inflation levels resulted in increased consumption. Historically, Indian
paint industry has grown close to 1.2 times of GDP growth.

In the industry, 65% is organized market and the remaining is unorganized. 80% of the organized market is
controlled by top 5 players being
Industry Introduction (Cont.)
The demand for paint industry is on the increasing side due to the following reasons

Rising demand in Urban India.

Rural India undergoing transformation

Demand rising in Tier II and III cities

Reduced duration of painting cycles from about 6-8 years earlier to about 3-3.5 years now

Increased purchasing power and changing consumer preferences

Rising demand in the auto industry, due to falling crude oil prices, new product launches,
expected interest rate cuts.

Governments mega push on infrastructure

Asian Paints Introduction- A glance through some
numbers
Number 1 Paint company in India

4th largest Paint company in Asia

Operations in 19 countries

26 Paint manufacturing plants

49 years of market leadership in India

Asian Paints Introduction- Sectoral revenues

From FY 15-16 data, 81% i.e., the

majority of the revenue is from
decorative paints.
Akzo Nobel Introduction
Owns two business divisions namely coatings and chemicals

Employees over 1800 employees

6 plants, 6 offices and 83 warehouses

8500 retailers and over 800 B2B customers

 Akzo Nobel Introduction

The data suggests that 93% of

the revenue is from coatings
segment and 7% from others
(Chemicals).
Benefits of Acquisition
ACCESS TO NEW MARKET (CHEMICALS) :
Maximum benefit from the AkzoNobel Plant wholly for the manufacture of chemicals in Mahad
Expected future investment for Asian Paints - Rs.22 cr per annum for three years

INCREASED REPUTATION:
Combination of first and fourth largest player in the market expected to go big
Expects a 1% increase in EBIDTA (Being conservative)
Y-o-y growth of 0.5% expected upto horizon period, beyond which EBIDTA is expected to grow at 0.25%

EMPLOYEE BENEFIT EXPENSE:

Additional cost expected to be incurred as AkzoNobel offers a higher % of revenue (8%) over the industry as employee
welfare expense.
Favourable decision is to set the employee welfare expense at 6.5% of the revenue
Additional cost incurred by Asian Paints is expected to be Rs.214.71 cr in the year of acquisition.
Benefits of Acquisition (Cont)
ACCESS TO THE DISTRIBUTION NETWORK:
Opportunity to utilise the strong market presence of AkzoNobel in eastern and northern India
Expected to widen the scope of distribution of Asian Paints
Assumed increase in sales for Asian Paints is 0.5%
Assumed decrease in sales for Akzo Nobel is 2%
Expected gain for the merged entity is Rs.337.54 cr ( in the year of acquisition)

DEPRECIATION:
Sources suggest the real market value of the assets (except buildings and land) as they were revalued recently.
Average multiple of 1.5 used to find the real value of buildings.
Expected additional depreciation is Rs.9.5 cr leading to a savings of Rs,3.23 cr.

INCREASED CREDIT LIMIT:

Expands the credit limit for the combined entity
Cost of debt expected to come down leading to a savings of Rs.1.34cr in the year of acquisition.
Final Proposal
There are three methods of settling this acquisition.

1. All Cash

2. All Equity

3. Part Cash & Part Equity

Synergy Values
The Maximum Value that Asian Paints would
Be willing to pay for Akzo Nobel would be the
total synergy value and the firm value of Akzo
Nobel which is INR 40,016.31Crores.

Asian Paints currently hold a 4.31% stake in

Akzo Nobel. They would be buying out the
remaining 95.69% share in Akzo Nobel.
Cash Consideration
The Benefit column shows the the
synergy value expressed in crores of
Rupees.
Asian Paints would choose a premium
on the last closing price of Akzo nobels
stock, that would be acceptable to the
shareholders of Akzo Nobel but at the
same time wouldnt cause Asian Paints to Part with
the entire Synergy Value.

For a detailed Table please refer the Methods

of Payment sheet in accompanying excel.
 Cash Consideration
The Current Market Price of Akzo Nobel is INR 1399. So by varying the price per share offered we have
shown in table, how the different share prices that Asian Paints could choose from would affect the cost of
the Acquisition, The Net Acquisition Value ( which is Benefit minus Cost) and the premium Offered.

For a detailed Table please refer the Methods of Payment sheet in accompanying excel
Cash Consideration
Since Asians do not have enough cash reserves to meet this share buyout we assume they would raise
the necessary funds through debt.

For a detailed Table please refer the Methods of Payment sheet in accompanying excel
Equity Consideration
7.22% is the Shareholding of AKzo Nobel in merged entity.

Asian Paints holds 4.31% in Akzo Nobel so the net holding of Akzo Nobel in 6.91% which is worth INR
8,128.69 Crores of total INR 1,17,636.39 Crores.

The Cost of acquisition is INR 1,600.92 Crores which is a premium of 24.52% over the current market
value of target.
Part Cash and Part Equity Consideration
The table shows the calculations for how much in equity
and how much in
cash Asian Paints offers to Akzo Nobel.

By Varying the equity part at intervals of 0.05, % value of

equity offered is found and the rest is offered in cash.

This can be calculated using D/E ratio of

Asian Paints. The current D/E ratio of Asian
Paints is 0.076 where the industry average is
0.13.
Part Cash and Part Equity Consideration
The table shows that how much Asian Paints can raise through debt by varying the D/E ratio keeping the
equity constant. The maximum cash that Asian Paints can raise to pay Akzo Nobel with D/E ratio 1.08 is
INR 6053.67 Crores.

As the rest of the amount is paid in equity,

equity portion varies which changes the
Resultant D/E ratio.

For a detailed Table please refer the Methods of

Payment sheet in accompanying excel
Thank you!!