Paint giant looks to expand its coverings business with acquisition

DUTCH paint giant Akzo Nobel last week boosted its war chest by selling its Organon drugs unit to Schering-Plough for $14.4 billion (£7.5bn), prompting speculation it will soon be in hot pursuit of Imperial Chemicals Industries.

Until last weekend, Akzo had insisted it planned to press ahead with a partial flotation of Organon on the Euronext stock exchange.

Among its 13,700 staff worldwide, Organon employs 350 people at Newhouse in Lanarkshire where it makes contraceptives and the synthetic HRT pill Livial. Akzo has invested £50 million in Scotland in recent years.

But last Monday the two firms revealed they had hammered out a deal that sees Organon valued 37% higher than a flotation would have done, according to analysts.

Akzo investors welcomed the move and shares soared 16% to their highest in more than five years. The paint firm, which is No 1 globally, is one of the last European companies to have both drugs and chemicals divisions.

"It's a day of celebration for Azko shareholders," one analyst said.

Azko said it will use the cash to buy back shares and reduce its pension deficit. But the company refused to rule out using some of the cash to go after ICI.

Akzo chief executive Hans Wijers said the company will "look at all targets that make strategic sense".

Shares in ICI, which owns the Dulux paint brand, also gained as merger speculations mounted and closed 5.4% higher on Monday at 489.5p.

James Knight, an analyst at Collins Stewart, predicts that there is now a "50% chance of an Azko bid" for ICI.

Other possible targets may include American firms Valspar and Sherwin-Williams.

Akzo Nobel employs 61,880 people and operates in 80 countries. It has the contract to maintain the Forth rail bridge. Despite being the No 1 coatings manufacturer, it only has a 10% share of the market.

Analysts say that as a larger company Azko will have the power to drive down prices from suppliers. Still, the company will probably have to sell its Crown paints operations in the UK to go after ICI.

A warning came from other industry watchers who predicted that Azko itself may become a target unless it moves fast to make an acquisition.

ICI may have its own merger plans after selling its Quest International flavours and fragrances unit to Switzerland's Givaudan.

Investors were more circumspect about Schering's prospects after the deal, which will boost its revenues by 60%. Some welcomed the buy, saying it reduces Schering's reliance on cholesterol drugs Vytorin and Zetia.

Organon is the third-largest manufacturer of contraceptives after Bayer and Johnson & Johnson, making the Marvelon birth-control pill and Implanon arm implant.

It also has five drugs in the final three stages of testing required to get US regulatory approval.

One of these is Asenapine, a schizophrenia drug, and Sugammadex, a product which allows doctors to reverse the effects of anaesthetics within minutes.

Schering's chief executive Fred Hassan called Organon "an unappreciated gem". He added: "In a consolidating industry, there are very, very, very few companies left which have strong research and a strong pipeline of late projects and new products that have a long patent life."

Schering made losses in 2003 and 2004 after generic competitors to its Claritin allergy tablet came on the market. Hassan has since restored the company's fortunes by cutting jobs and shutting plants. But he stressed that although some jobs would go at Organon, losses would be limited.

If Asenapine is a success, sales could exceed a $1bn. The market for brand-name schizophrenia pharmaceuticals grew 20% last year to $14.7bn.

But there is concern that the drug may flop. The world's largest drugmaker, Pfizer, withdrew from a deal to help develop the medicine last November after it failed to prove effective in late-stage human clinical trials.

Organon also includes an animal health unit. Intervet is the biggest maker of animal vaccines and its products were used to protect animals at London zoo against bird flu. It will provide Schering with a steady flow of income.

Hassan said: "The biologic capacity is very helpful to us. This is a hugely valuable part of the asset valuation."

Azko sold the unit after sales grew by half the industry average. Schering expects to make $500 million in savings after three years and forecasts the purchase will boost earnings 10 cents per share in the first year.

Schering's shares rose less than 1% after the deal was announced.

Some analysts say Schering has taken on too much debt to fund the deal. Fitch ratings agency has already downgraded Schering.

The deal ranks as the biggest sale of a Dutch firm to a non-Dutch company.