Britain's Imperial Chemical Industries has rejected a 7.2 billion-pound ($14.2 billion) bid approach from Dutch chemicals group Akzo Nobel, saying it undervalued the company.
Shares in ICI, which makes Dulux paints, closed at 15.6% at 634.50 pence on Monday, after news it had rejected the 600 pence-a-share cash proposal.
Akzo Nobel , the world's largest maker of industrial coatings, fell 1% to 60.94 euros. Rabo Securities said a bid of 600 pence a share or above would be value-destroying for its shareholders.
ICI, Britain's biggest chemicals company, has long been tipped as a bid target after slimming to focus on high-margin paints and adhesives, and speculation Akzo would make a bid rose after the Dutch group sold its drugs unit in March for 11 billion euros ($14.7 billion).
Buying ICI, which makes 27% of its sales in Asia, would give Akzo a bigger share of fast-growing emerging markets and help it fix its underperforming European decorative business, with minimal antitrust issues, analysts said.
"Akzo Nobel will continue to evaluate all strategic opportunities, including ICI, based on a disciplined and value-driven approach to earnings and returns over cost of capital," Akzo, which makes Crown paints, said in a statement.
Apart from ICI, Valspar and Sherwin-Williams are among Akzo's likely takeover targets, analysts have said.
ICI said its directors had unanimously rejected the Akzo proposal. "The board is very confident in the group's strategy and strong growth prospects," it said in a statement.
ICI shareholder Standard Life Investments said it supported the move.
"The decision of turning down an offer of 6 pounds a share makes perfect sense and in our view as shareholders only an offer well in excess of 7 pounds a share given the synergy and geographic benefits available to the potential bidders," Standard's Head of U.K. Equities David Cumming said.
"With the cycle nearing the peak, we believe that other chemical companies will look at ICI as a way of broadening product geographic exposure," JP Morgan Cazenove said in a note.
"With no shortage of likely interest, and a robust ICI response, the pressure on the share price will likely be upwards."
Analysts said ICI could attract other suitors, such as U.S. groups Dow Chemical and DuPont, Germany's BASF and India's Reliance.
Some analysts said the purchase price could rise to as high as 750 pence, or 13 times EBITDA (earnings before interest, tax, depreciation and amortization), given the scarcity value of ICI's assets and the possibility of a bidding war.
This compares with BASF's purchases of U.S. firm Engelhard and Degussa's construction chemicals unit last year at just over 10 times core earnings.
The $85 billion coating industry is fragmented, with Akzo accounting for 10% of the market and ICI 5%. The top 10 makers have less than 50%, according to Citigroup.
The Dutch group currently makes about 45% of its sales in mature decorative markets, and a deal would give it ICI's market-leading position for both its paints and National Starch business, according to analysts.
But an acquisition would also see any buyer take on ICI's pension liabilities of 9.2 billion pounds, bigger than its market capitalization of 7.6 billion pounds.
The firm has cut its pension deficit to 850 million pounds with increased contributions following asset sales, but analysts say its pension trustees could demand a big injection of cash into the fund as a condition of their support for a deal.
Founded in 1926, ICI pioneered the development of synthetic materials, including a laboratory accident in 1933 that led to the creation of polythene. In 1984 it became the first British company to achieve 1 billion pounds in pretax profits.