Mergers and acquisitions: Lucky Cement led group buys ICI Pakistan for $152m

AkzoNobel completes de-merger chemicals business of the colonial-era multinational, will keep paints business. DESIGN: ESSA MALIK

The price agreed in the all-cash detail was Rs205.10 per share, a 29.7% premium over Friday’s closing price on the Karachi Stock Exchange. The deal values the company at Rs18.9 billion ($201.2 million). Since the Yunus Brothers Group does not have a holding company, it put together a consortium of the group firms, led by Lucky Cement.

The Yunus Brothers Group is one of Pakistan’s largest industrial conglomerates, with major interests in textiles as well as owning the largest cement manufacturer in the country. Lucky Cement, listed on the Karachi and London stock exchanges is the best known of the group’s holdings, but the largest by revenues is actually Yunus Textile Mills, a garments manufacturer based out of Karachi.

ICI Pakistan was originally a subsidiary of the British colonial-era company Imperial Chemical Industries. The firm has been operating in Pakistan since 1944, originally called the Khewra Soda Ash Company. In 2008, the global parent ICI was bought out by Dutch paints and chemicals giant AkzoNobel, following which ICI Pakistan became part of AkzoNobel worldwide. In 2010, the company made a decision to focus on the paints business, AkzoNobel’s global specialty, and spin off the chemicals business.

The spin-off, labelled a “demerger”, was completed in May 2011, creating two separate companies: AkzoNobel Pakistan and ICI Pakistan, though at the time, both were owned by the global AkzoNobel. The process to find a buyer for ICI Pakistan began on June 13 of this year.

Three parties bid for the company: the Yunus Brothers Group, the Nishat Group (the largest private sector conglomerate in Pakistan), and a consortium of ICI Pakistan’s employees backed by Dubai-based private equity firm Fajr Capital. Nishat backed out at the last minute.

ICI Pakistan is one of the country’s most respected companies, attracting some of the most talented college graduates and generally ranking high among desirable places to work. ICI’s employees had hoped for a repeat of the now-famous management buyout of Engro from what was then its global parent, Exxon. That deal started from a similarly small, but talent-heavy company in the chemicals business becoming one of the largest and fastest growing industrial conglomerates in Pakistan.

In the end, however, they were beaten out by the Yunus Brothers Group. The conglomerate, owned by the Tabba family, is likely to be happy with their buyout, despite the premium they paid. ICI Pakistan is more than six times larger than AkzoNobel Pakistan, though the latter has higher margins.

For the financial year ending December 31, 2011, ICI Pakistan’s revenues grew 16.5% to Rs38.3 billion. Profits, however, did fall by about 28% to Rs1.75 billion, largely due to higher input costs. ICI’s net profit margin is 4.6%, compared to the 5.7% profit margins at AkzoNobel.

Yet it is not just margins that AkzoNobel is chasing. The global parent believes that the long-term market for paints in both Pakistan as well as the Middle East is largely untapped and growing rapidly. The firm plans to use its Pakistani base to export to markets in the Persian Gulf region.

There is likely to be a very sharp culture clash: ICI is the very model of a highly professionalised multinational corporate environment in Pakistan, whereas most Yunus Brothers companies behave more like traditional family-owned businesses.

It is also unclear how many of ICI’s senior management team is likely to stay, now that they have lost their bid to buy the company they run, though Yunus Brothers felt the need to extend the olive branch. “The YB Group is committed to retain existing experienced management as they are the most critical component for the development of the company,” said the group in a statement issued to the press.

How the Yunus Brothers plan to finance the transaction is also not clear, since the group is already planning to expand their cement manufacturing business by setting up a factory in the Democratic Republic of the Congo.

Lucky Cement stock fell 5.4% in trading on the Karachi Stock Exchange on Monday, to Rs123.85 per share as investors worried the company would cut its dividend payout to finance the transaction.

Published in The Express Tribune, July 31^st, 2012.