1. Paint Wars ICI’s 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 Raj Purohit Kotak Mahindra Capital Company
Bombay, October 1997
Raj Purohit
An associate’s 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 Latest Guidelines in Jan 97
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. Higher Cost Structures
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 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 %
Danis, Vakils, and Chowksis %
Public and Mutual Funds 28%

11. 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’

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

13. The Bid - Valuation Naïve Method Problem Areas P/E and DCF
Used Indian CAPM for WACC = 16.5%
Value Rs. 346/share
Problem Areas
International WACC ~ %
Value Rs Rs 170/share

14. The Bid - Real Option Naïve Method Problem Areas
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. Q&A