Think Again / A Second Look At Sectors And Stocks

 (From THE WALL STREET JOURNAL EUROPE)
  There's room for M&A
  in the North Sea oil sector

  Don't bank on initial public offerings in the North Sea's oil-and-gas exploration sector. Rather, acquisitions will
pick up as market leaders seek to boost reserves with acquisitions of smaller players. Privately owned First Oil PLC is
bound to draw the big boys' gaze.
  Based in Aberdeen, U.K., and controlled by its chairman, Ian Suttie, First Oil reported 2010 revenue of GBP 63 million
 ($101.7 million) and could easily attract interest from Dana Petroleum, a GBP 1.67 billion business, also based in
Aberdeen, that has an aggressive M&A track record.
  IPO or trade sale? Let's look at the landscape.
  North Sea oil output is declining by 6% a year, and as reservoirs empty, increasingly  high-cost techniques are
required to exploit them. These techniques may be arresting the rate of decline, but the growing marginal cost of
extraction, combined with diminishing reserves, has driven most major oil companies from the North Sea, opening the
field to smaller companies.
  There are plenty of profits still to be made. The trade group Oil & Gas UK recently reported that the North Sea
produced 2.3 million barrels of oil a day in 2010 and explorers have discovered more.
  All this points to medium-term consolidation among smaller players and a surging need for capital to fund their
expensive and complex core operations.
  Dana is an obvious buyer for First Oil. The two firms have a production partnership in the Anglia oil field and are
partners on discoveries in the Kerloch and Platypus fields. Another partner, Apache Corp., with a stock-market value of
$43 billion,has been a key beneficiary of the major firms' withdrawal and also has an acquisitive bent.
  Of course, an IPO window may open for First Oil, but history suggests not. According to Dealogic, there have been only
 22 IPOs of more than $75 million in the European oil-and-gas-exploration sector since 1995. Only four involved U.K.
companies.
  Meanwhile, the North Sea's big fish lie in wait.
  -- Mike Weir and Alessandro Pasetti

  Akzo's unhappy shareholders

  Akzo Nobel NV's shareholders own a stock that trades where it did 10 years ago. They should be hoping that Akzo gets
bought. They are more likely to get something less satisfying: Akzo seeking to buy a smaller company.
  Akzo has the makings of a target, with a low relative valuation at under six times estimated 2011 earnings before
interest, tax, depreciation and amortization, modest net debt and a sound profit-growth trajectory. But its own size and
 the poor balance sheet of its most likely buyer -- Dow Chemical Co. -- make a takeout unlikely.
  The next-best option for the Dutch chemicals maker is to act as a consolidator in coatings and specialty chemicals, a
role the firm played through its 2007 acquisition of Imperial Chemical Industries PLC. A bid for Germany-based Symrise
AG or U.K.-based Croda International PLC would make sense.
  Symrise and Croda have high margins and countercyclical properties. Either deal could be financed easily: Both
companies have low debt and enterprise values under 3 billion euros ($4.21 billion), compared to Akzo's 12 billion
euros.
  Akzo's three business units -- performance coatings, decorative paints and specialty chemicals -- account for almost
equal shares of its revenue. However, the specialty chemicals unit is responsible for by far the largest share (44%) of
group Ebitda, making bulking up further there an accretive proposition.
  Both Symrise and Croda offer Ebitda margins of 20%-plus, versus the 12% Akzo's combined businesses posted last year.
Then there are the possible cost savings, to further boost Akzo's Ebitda margin, which the market expects to expand from
 the low- to the mid-teens by 2013.
  Symrise specializes in flavors, fragrances and cosmetic ingredients. In addition to the countercyclical nature of its
business, its presence in emerging markets -- a key area for Akzo -- makes the German company especially appetizing.
Nearly half of Symrise's 2010 revenue of 1.6 billion euros came from emerging economies.
  Croda is focused on specialty chemicals for the consumer care and industrial specialties markets. A presence in
coatings and polymers would make a good fit with Akzo's current portfolio.
  All that said, investors would surely prefer a takeover. Might one be pulled off, against the odds?
  -- Alessandro Pasetti and Jacob Plieth
  ---
  Think Again uses material from Dow Jones Investment Banker. For more information, visit www.dowjones.com/banker.