Paint maker Akzo Nobel India is in the process of winning over the financial institutions which had opposed its proposal of merging three unlisted group companies with itself over issues such as valuation and royalty payments.
The opposition was more because of poor communication by the company about the merger rationale, Amit Jain, managing director, Akzo Nobel said on Tuesday, claiming that many financial institutions (FIs) have since come around.
“Once our team started engaging the shareholders, I can tell you that a lot of FIs, on a 50% level, changed their mind. Sometime in December, some FIs even put a buy order on us once we got into the communication,” he said.
According to Jain, the merger will help Akzo Nobel service big customers in sectors such as defence, besides addressing segments like wood finishes and strengthening its presence in specialised coatings business. It will also help realise synergies in research and development.
Jain spent much time trying to convince shareholders gathered at the court-convened meeting that the proposed merger was a historic occasion for the global paint company and would result in all-round benefit, and why it shouldn’t be viewed as a destroyer of shareholder value.
The proposal was then put to vote via ballot box following demands from a section of shareholders who refused to clear it through the normal practice of show of hands.
Save this, the Akzo Nobel management had a smooth sail with few voices of dissent such as that of brokerage firm Ratnabali Capital Markets.
“The valuations (of unlisted companies) are a little too steep. Jain said profits would go up. But the numbers don’t support. We expect the earning per share to come down and the profit margin to fall from 13.5% to 10%. So, how exactly will this merger help us?” asked a representative of the brokerage firm.
The shareholder also pointed out the issue of royalty payment to the global parent for things like use of Dulux brand, which he said, will go up from 1% to 3%.
The weighted average technology and brand fee of 3% is “less than what many MNCs in India pay their parents,” Jain told reporters after the meeting.
For the record, Akzo Nobel India on Friday said its board will on February 14 consider a review of the royalty arrangement with Akzo Nobel NV apart from a share buyback proposal from minority shareholders.
On valuation of the unlisted companies, chief financial officer and director Partha Sarathi Basu said they have been valued almost at par with the listed company into which they are being merged.
The board of Akzo had in a meeting held in October approved the merger of the three unlisted firms — Akzo Nobel Coatings India, Akzo Nobel Car Refinishes India and Akzo Nobel Chemicals effective April 2011.
A segment of financial institutions, which hold 18% stake, then reportedly raised issues regarding the valuation, merger ratio, royalty payment and the rise in parent company’s stake and even asked the company and also its independent directors like R Gopalakrishnan, Renu Karnad, Sanjiv Misra and Arvind Uppal to re-examine the terms of the merger.
A valuation skewed towards the unlisted companies would result in promoter group’s shareholding going up to 67% from 56.4%, they said.
The FIs also asked why the Indian company would start paying royalty for the Dulux brand from 2014 against an existing technology transfer fee arrangement.
Following these protests, the company on February said it will consider a share buyback proposal from minority shareholders “for implementation at the earliest opportunity.”
“There are other simpler ways for a parent to raise stake. They need not come with such an important merger decision to do that,” Jain reasoned.
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