Akzo Nobel, the Dutch chemicals giant, admitted this morning that it has made an approach to buy ICI in an all-cash deal valuing the British group at £7.2 billion. ICI's management has rejected the proposal which it said "significantly undervalues" the company.

The deal is now likely to spark a bidding war for ICI, which has been identified as a possible target by at least two other international companies.

Akzo Nobel's proposal was pitched at 600p per share when it met with ICI's management on June 4. ICI said this morning: "The board is very confident in the group's strategy and growth prospects".

However, Germany's BASF and America's Dow Chemicals are expected to launch competing offers. Analysts estimated this morning that the bidding could top 700p.

In early trading, ICI shares rose 17.12 per cent to 643p. Any bid for ICI will have to take into account the British company's pension deficit which has a net liability of £980 million and a gross liability topped £9.2 billion.

The gross liability is the total value of retirement payments that ICI will have to make to employees and does not take into account the value of the assets in which the fund is invested. The net liability includes the value of the assets in which the pension fund is invested.

ICI last conducted a review of its pension fund and the value of its assets two years ago, in 2005. The next valuation is due in 2008. However, Akzo Nobel has experience at dealing with pension funds in acquired business. In 1998, it paid £1.8 billion for Courtaulds, the UK coatings and fibres business, which had a £1.3 billion pension scheme. After buying the business, Akzo Nobel appointed two independent fund managers, Schroder Investment Management and Morgan Grenfell Asset Management, to look after the fund.

Bidders for ICI are likely to face strong resistance from shareholders in the UK company unless they substantially raise their offer above Akzo Nobel's opening shot.

David Cumming, UK equity select fund manager at Standard Life Investments, which is the third largest shareholder in ICI with a 5.96 per cent stake, told the BBC this morning that ICI's management had its backing to carry on as an independent company and to make acquisitions of its own. Mr Cumming indicated Akzo Nobel would have to raise substantially its offer, to perhaps as high as 700p, above the 600p per share deal presented to ICI's board a fortnight ago.

Akzo Nobel said this morning that ICI "would represent a highly attractive addition to its focuses coatings and chemicals business following the announced sale of Organon Biosciences earlier this year". Akzo Nobel sold the business to America's Schering-Plough for £7.5 billion, giving it the cash it needs to buy ICI.

The Dutch group also said this morning that there was "no certainty" that it will make another offer for ICI.

The management at ICI, in particular its chief executive John McAdam, is highly rated by investors after turning the company around. When Mr McAdam was promoted to lead the company in 2003, its shares were trading at five-year low of 90p. Four years later, its shares are now trading 510 per cent higher.

An Anglo Dutch tie-up may also face competition hurdles since a combination would give Akzo Nobel a dominant position in the domestic paints market. ICI operates Dulux while Akzo Nobel owns Crown.

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