Fat Prophets take profits

Imperial Chemical Industries (LSE, ICI) has been a stalwart of the Fat Prophets Portfolio since December 2004 (FAT64). Today this period is drawing to a close. Not just for ICI as a holding, but also as a celebrated British institution with a long and proud history. At the start of next year, ICI is on schedule to become a part of rival Dutch coatings and specialty chemicals company, Akzo Nobel.

"...for the shareholders, there is a premium of 22 percent over ICI's stock price the day prior to confirmation of Akzo's approach back in June, and 44 percent above that before the sale of Organon BioSciences."

At the time of our initial recommendation the extent of change at the company was not yet evident. However, in the intervening years, transformation better describes the changes ICI has undergone.

Complimenting the sale of non-core operations were several cost savings initiatives. With raw material prices on the rise, controlling costs was important for ICI. Along these same lines, we believed at the time the company would also be able to offset some of the impact with price increases of its own. This in fact turned out to be the case.

With minor operations now gone, ICI turned towards larger business segments as the focus on operational improvement never abated. By the end of last year, this resulted in the sale of Uniqema, an oleochemicals and surfactants operation, quickly followed by the disposal of Quest, the Fragrances and Flavours business, at the start of 2007.

Whilst no doubt streamlining the company, the smaller and now much less indebted ICI (due to sale proceeds) also became an attractive takeover target. Market leading positions with great brand strength in both developed and fast growing emerging markets heightened the appeal.

Akzo Nobel's sale of Organon BioSciences to Schering Plough for £7.5 billion, plus the desire to strengthen its own coatings and chemicals business, left ICI's future as independent looking even less certain.

By June, Akzo had tabled an initial offer at 600p per share. In our last review of ICI (FAT189) we believed this would not be sufficient to carry the day. In the event, Akzo has returned with a 670p cash offer which the board of ICI have accepted.

We agree that this offer represents fair value for ICI. The offer price values ICI at around £8 billion. And for the shareholders, there is a premium of 22 percent over ICI's stock price the day prior to confirmation of Akzo's approach back in June, and 44 percent above that before the sale of Organon BioSciences.

Shareholders of both companies for the most part agree the deal is a good one as well. (79 percent of Akzo's shareholders voted in favour.) Earlier this week both groups cleared the way for the merger to occur effective January 2, 2008. Additional regulatory approval is still outstanding, however we do not view this as a deal breaker at this stage of the process due to the fragmented nature of the industry.

As we stated at the start, ICI has been a great contributor to the Fat Prophets Portfolio over the years. The reorganisation, price increases and efficiency savings have positioned the company ideally for future growth. As such, were it not for the takeover, ICI would remain in the portfolio.

However, the approved takeover offers the opportunity for Members to lock in some of those future earnings benefits today. Given the shakiness of some markets in which ICI had exposure to such as America, we are able to also see the plus side of accepting the Akzo offer.

A brief look at the charts confirms ICI has been a strong performer over the past four years. Excluding dividends, the takeover offer of 670p, represents a gain of 182 percent from our recommended buy price of 237p in December 2004. Since this initial recommendation, ICI's annualised return has been just about 43 percent.

As such, we recommend Members hold ICI until such time as the shares are cancelled in January and the cash takeover proceeds are received. In addition, shareholders of record on December 19 will also receive a 5p dividend. Having received the approval of both companies' shareholders, we believe the deal will now progress as scheduled. Accordingly, we will remove ICI from the portfolio and not be reviewing again.