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Paint Wars ICI’s Bid to buy Asian Paints India Ltd. February 21, 2000 Ankur Paint Wars ICI’s Bid to buy Asian Paints India Ltd. February 21, 2000 Ankur Meattle Rohit Rathi Brad Winer Wee Yee

Agenda • • Introduction The Environment The Players The Bid The Hold-up Options Conclusions Agenda • • Introduction The Environment The Players The Bid The Hold-up Options Conclusions

Introduction • Setting – Bombay, October 1997 • Raj Purohit – An associate’s dilemma Introduction • Setting – Bombay, October 1997 • Raj Purohit – An associate’s dilemma • Kotak Mahindra Capital Company – The story – Deal gone sour !

Investing in India • Economic Reforms • Major areas in 1991: – Licensing – Investing in India • Economic Reforms • Major areas in 1991: – Licensing – Privatization – Foreign Investment • Corporate Governance Problem

Investing in India • Uncertainty in Policy – Changes since 1960 – 1960: Investment 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

Investing in India • Three Regulatory Bodies – Foreign Investment Promotion Board – Ministry Investing in India • Three Regulatory Bodies – 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. ”

The Paint Industry • Not protected or priority sector • Two Strategic Groups ORGANIZED 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%

Indian Paint Industry • Industrial (30%, Rs. 6, 442 MM) – Automotive, Special Purpose, 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

Indian Paint Industry ORGANIZED SECTOR BY MARKET SHARE # 1 Asian Paints (33%) # 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

Players - Asian Paints • Rs. 6980 MM ($175 MM), Rs. 378 per share Players - Asian Paints • Rs. 6980 MM ($175 MM), 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 9. 5% 41. 06% 28%

Players - ICI Plc. , UK • $15 BN, Diversified, ICI India - Rs. 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’

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

The Bid - Valuation • Naïve Method – P/E and DCF – Used Indian The Bid - Valuation • Naïve Method – P/E and DCF – Used Indian CAPM for WACC = 16. 5% – Value Rs. 346/share • Problem Areas – International WACC ~ 20 - 27% – Value Rs. 220 - Rs 170/share

The Bid - Real Option • Naïve Method – P/E (23) regressed on Market The Bid - Real Option • Naïve Method – 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

The Hold-Up: Nov 1, 1997 • Asian Paints refuses to transfer shares, reasons provided 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

Options for KMCC • Sell back to 3 promoters • Negotiate with ICI, share/bear Options for KMCC • Sell back to 3 promoters • Negotiate with ICI, share/bear all losses (ICI has favorable contract) • Appeal to FIPB, Mo. I • Sell to 3 rd party • Sell to ICI India • Combination

What Happened • Stock hit an all time low on 23 rd June 1998 What Happened • Stock hit an all time low on 23 rd 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)

Q&A Q&A