Akzo Nobel will succumb to pressure from the Takeover Panel today to reveal details of an offer made to ICI that valued the British paints and adhesives company at more than £7 billion.

In a brief statement to the London Stock Exchange today, Akzo will confirm that it made an offer to ICI a fortnight ago, which was rejected. However, Akzo’s admission will effectively put the British company up for sale, encouraging rivals to outbid the Dutch chemicals group in an auction of the Dulux paints brand.

Potential bidders for ICI may include BASF, the German chemicals company, and Dow Chemical, of the United States, attracted by the surge in demand for paints in China, where Akzo’s own coatings business is reporting 12 per cent growth per annum.

The Dutch company has the financial resources to put up a fight for the Dulux prize that could raise the ICI price well above 600p per share, the price of the indicative bid. One potential stumbling block to a bid could be ICI’s pension deficit which trustees have said could range from £500 million to £2.2 billion depending on their view of a bidder’s financial stability.

Akzo will soon possess a cash hoard of €11 billion (£7.5 billion), the proceeds from the sale of Organon, its pharmaceutical unit, to Schering-Plough.

Hans Wijers, Akzo’s chief executive, speaking to The Times last week, denied that he was under pressure to do a big deal: “Does the money burn a hole in our pockets; the answer is ‘no’. If we see no opportunity in a reasonable time that meets our financial requirements, we will return the funds to shareholders.”

However, Mr Wijers has given himself aggressive targets to achieve greater scale and margin in its coatings business, which is No 1 worldwide with leading positions in the industrial and marine sectors. It lags in the decorative segment, where its margins have been weaker than those of ICI.

The surge in demand for a dull product has inspired City analysts, who forecast a flurry of deals. Merrill Lynch said recently that Akzo had the resources to make a bid for any of the leading coatings companies, including ICI, PPG and Sherwin Williams.

Mr Wijers, speaking in Shanghai last week, where Akzo held a board meeting, set the group an aggressive target to more than double its Chinese sales from €800 million to €2 billion by 2012, with decorative paints a key area for growth.

Akzo’s approach to ICI is the first significant move in a sector ripe for shake-up. Its leading position gives it a market share of only 8 per cent, with ICI in second place. ICI would give it a better position in the US decorative paints market and in China, where Dulux is finding its way into homes.

Analysis

In a factory complex north of Shanghai, workers spray chemical coating on wardrobes as they arrive on a conveyor, giving pale new wood an antique mahogany patina. Every month Lacquer Craft’s factory in Jiashan City ships 1,200 containers of furniture to America, making it a key customer for Akzo Nobel’s wood coatings plant just down the road.

“Americans are wonderful people,” Neil Galloway, Akzo’s operations manager in Jiashan, said. “When they buy a new house, they buy new furniture.” He is delighted with the current fashion for “aged” wood, which requires as much as 15 coating applications.

China is the reason why coatings, once regarded as a dull, low-technology and mostly low-margin business, has become a hot market that Akzo Nobel hopes will give the Dutch company a big boost. Wood furniture exports from China to the United States have risen from $500 million in 1997 to $5 billion and Akzo has followed the makers from the US to Taiwan and on into mainland China. In powder-based coatings for metal, Akzo has played the same game, pursuing Asian electronics companies, which have established assembly plants in mainland China.

So far, China has been an export-based coatings opportunity, but over the horizon is the long-hoped-for surge in Chinese consumption of decorative paints. Household spend per head on paint in China is just $19, compared with $169 in America. But Chinese wage rates are soaring. Akzo has a weak position in the decorative paints sector compared with ICI in the fragmented Chinese market: a takeover of ICI would give the Dutch a leg-up in a race, worth $7 billion, to paint Chinese walls.

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