Dutch chemicals group Akzo Nobel has won access to Imperial Chemical Industries' books after raising its indicative bid for the British maker of Dulux paints to 8.0 billion pounds ($16.3 billion).
The two firms said on Monday that Akzo, which has teamed up with German consumer goods firm Henkel for the bid proposal, was now offering 670 pence a share in cash, up 3% from the 650 pence a share rejected by ICI last week.
Buying ICI would strengthen Akzo's leading position in the world's $85-billion-a-year coatings industry, giving it a market share of about 15% and increasing its exposure in North America and emerging markets, as well as in decorative coatings.
But some analysts think Akzo, which makes Crown paints, is offering a full price and could face opposition from its shareholders. It could also face a bid battle, after a source familiar with the matter told Reuters last week that U.S. group Dow Chemical was interested in bidding for ICI.
"The biggest hurdle remains approval of the deal by Akzo shareholders. We estimate the chances are better than evens, but difficult to call," Collins Stewart analyst James Knight said.
Petercam analyst Jan Van den Bosshe said access to ICI's books was an important step as it could allow Akzo to identify more synergies. "More synergies can also make the bid price more acceptable to Akzo shareholders," he wrote in a research note.
Akzo first proposed a bid at 600 pence a share for ICI in June, and then teamed up with Henkel, the maker of Persil detergents in Germany, for its last two proposals.
If the deal goes ahead, Henkel will buy ICI's adhesives and electronic materials units for 2.7 billion pounds, around the top end of market forecasts.
Britain's Takeover Panel has set Akzo a deadline of Thursday to make a firm offer for ICI or walk away.
Sources familiar with the matter said both sides were aiming to reach a deal by then, but ICI had not ruled out asking for an extension or removal of the deadline.
ICI said it had granted "limited" due diligence to Akzo and the process would be completed within a few days.
Getting Chemistry Right
Under the proposed offer, ICI shareholders would also receive a second interim dividend of up to 5 pence paid on a pro rata basis from July 1 to the date of completion.
The firm, Britain's biggest chemicals company, has long been tipped as a bid target after slimming down to focus on higher-margin paints and adhesives.
"Akzo Nobel was able to make this increased proposal after further discussions with both ICI and Henkel," Akzo said in a statement.
At 670 pence a share, Akzo is offering over 12 times ICI's estimated earnings, while Henkel's purchase price is pricier at 15.5 times earnings. These compare with BASF's purchases of U.S. firm Engelhard and Degussa's construction chemicals unit last year at just over 10 times.
However, analysts said Henkel was also offering a high price for the part it wants, which would help Akzo's cause and allow it to return cash to its shareholders.
"Potentially it (Henkel's contribution) will help Akzo to appease some of its shareholders' concerns that it is overpaying for ICI," Goldman Sachs analysts wrote in a research note.
"While the deal has been sweetened, we believe that there could still be further shareholder unrest. We believe that the deal could take up to 6 months to close as antitrust approval will be required."
Henkel said it expected to make annual synergy savings of between 240 million and 260 million euros ($332-360 million) from the ICI businesses it hopes it buy. It said it would fund its part of the deal with debt and/or equity capital and was also looking into divesting non-core assets.
Goldman Sachs analysts forecast Akzo could achieve around 260 million euros of synergy benefits from buying ICI.
DuPont, Germany's BASF and India's Reliance have also been tipped as potential bidders for ICI.