FIs question Akzo Nobel merger plan

While we support the companys decision to merge the unlisted entities to avoid any future conflict of interest,we strong believe that the unlisted entities have been overvalued. As a result of overvaluation,the parent companys holdings are increasing at the expense of non-promoter and public shareholders, FIs said in a letter. The merger is earnings and book value dilutive which is unfair given that acquired companies have weaker financials and fundamentals than the acquiring company and this clearly indicates that the acquired companies are being compensated more than their worth, FIs said,adding,we believe the listed entity8230; deserves to trade at higher valuation multiples which certainly does not come across through the merger ratio. After the merger,the parent group holding in Indian company will increase from 56.4 per cent to 67 per cent.

Responding to queries from The Indian Express,a company spokesperson said,The company did receive letters from some of the institutional shareholders to whom detailed response fully addressing their concerns in areas such as rationale for royalty proposal,justification for valuation,process followed for valuation etc was given.

On the plan to revise royalty,FIs said the significant increase in royalty is detrimental to the Indian companys operations. Seeking additional disclosure on the royalty,FIs said,while Akzo Global is a recipient of the royalty,the Indian subsidiaries and its minority shareholders are materially impacted by these payouts; such aggressive royalties have to be toned back significantly. Controlling shareholder should not be guided by maximum permissible royalty under law but by principle of fairness and sound economic logic as if the two entities under consideration are truly independent.

Although not required by law,as good governance practice,we would like this to be put to shareholders to vote, FIs said. FIs also asked how Dulux brand came under royalty terms from FY14. There was only technical/ technology transfer fee to the extent of 1-1.5 per cent of revenue earlier,it said. They also proposed that any new technology or brands sourced from the parent should be value additive,and any changes in royalty terms should not be return on capital and margin dilutive.

Clarifying the companys stand,the Akzo Nobel spokesperson said,Taking into account the potential synergies and the business opportunities the merging companies bring,the company believes that the merger will result in enhancement of value for all shareholders. A very transparent process of valuation involving three independent audit firms and a Category I Merchant Banker have been carried out with utmost diligence. Akzo Nobel said well-recognised methods of valuation were adopted by them and the sanity check of past performance further confirms the fairness of the process,with about 10 per cent lower trailing multiples of sales and profit for the merging companies. The increase in parent company holding is the natural consequence of the merger as the parent company holds 100 per cent of two of the merging companies and over 98 per cent of the third one. According to the company,through the royalty arrangement,Akzo Nobel India has instant and seamless access to recipes,formulae,products and process development from Akzo Nobels global Ramp;D efforts. This will provide tangible benefits in the form of superior formulations, new products etc. Regarding Dulux brand,the spokesperson said,under the existing arrangement,the companys concession to enjoy of royalty free use of the brand expires in Q4,2014. Post this period,payment of royalty to the owner of the brand is a natural consequence.

Asks for voting

Financial institutions oppose proposal of Akzo Nobel India Ltd for amalgamation of its arms Akzo Nobel Car Refinishes India Pvt Ltd,Akzo Nobel Chemicals India Ltd and Akzo Nobel Coatings India Pvt Ltd with itself

FIs,which hold 18 stake in Akzo Nobel India has asked independent directors and the company to re-examine the terms of the merger failing which they will vote

They say that the unlisted entities have been overvalued and as a result the parent companys holdings are increasing at the expense of non-promoter and public shareholders

Akzo Nobel India says that it believes that the merger will result in enhancement of value for all shareholders