The transaction meant that PPG had passed both Sherwin-Williams and Akzo to claim the number one spot as the world’s
largest coatings company, even though it remained the number
two player in architectural coatings in North America, second to
Sherwin-Williams. But in less than two years, PPG had used acquisitions to become the greatest competitive threat to Sherwin-Williams on its home turf.
Given that this was the second time in seven years that PPG
had come out ahead of Sherwin-Williams in competition for
a significant “transformative” acquisition, it may have been
inevitable that Sherwin-Williams’ management and Board of
Directors would have been tempted to pursue something big.
Nevertheless, it came as a surprise to many industry professionals when Sherwin-Williams announced that it would acquire
Valspar in March 2016 for an enterprise value of $11.3 billion
or 15 times Valspar’s estimated 2016 EBITDA. It was surprising because many thought that a merger between the second
largest coatings company in the world (Sherwin-Williams), and
the fifth largest (Valspar) would be out of the question due to
anti-trust considerations. Anticipating this, Sherwin Williams
built some safeguards into the merger agreement allowing for
a purchase price adjustment in the event one company or the
other had to divest assets over a certain dollar limit in order
to get the deal approved. But it appeared that Valspar and
Sherwin-Williams had remarkably little overlap that would
concern regulators, and in fact, it may be that Valspar is the
only major coatings company Sherwin-Williams could acquire
that the U.S. Federal Trade Commission would allow. Still, to
obtain the necessary approvals, Valspar had to divest its North
American industrial wood coatings business, which it sold to
Axalta in April for $420 million. The Sherwin-Williams/Valspar
merger is now scheduled to close in Q2 2017, and it may have
already closed by the time you read this.
When the deal was announced, it was priced at a 41 percent
premium over Valspar’s average daily closing stock price for the
preceding 30 day period. Such a large premium over the stock
price and an EBITDA multiple of 15 may seem like a rich valuation for a coatings company, but Sherwin-Williams’ management expects that the acquisition will be immediately accretive
to earnings and will generate approximately $280 million in
synergies by 2018. Factoring in these expected synergies reduces the Enterprise Value/EBITDA multiple to about 11 times.
From a strategic perspective, the transaction will strengthen Sherwin-Williams’ grip on architectural coatings in North
America, adding about $1.0 billion to the approximate $9.4
billion in revenues generated by Sherwin-Williams’ Paint Stores
and Consumer Groups. But the real value of the transaction for
Sherwin-Williams lies in its diversification benefits. The combined companies will have a more balanced portfolio, less dependent on architectural coatings and more international in scope.
Once the deal closes, Sherwin-Williams will displace PPG
and once again be the largest coatings company globally. But re-
cent developments indicate that it’s possible it won’t retain that
position for long. In March, PPG extended an unsolicited offer
to acquire Akzo (3rd largest global coatings company) for about
$22 billion. Akzo’s board rejected that offer as too low, leading
PPG to increase its offer twice more. The last offer, made at the
end of April, valued the company at $27.1 billion. Akzo ap-
pears determined to remain independent, rejecting each offer in
turn and proposing instead to increase value for its shareholders
by spinning off or selling its specialty chemicals business. PPG
has some support from Akzo shareholders, including the activ-
ist investor Elliott Management Corp., which is calling for a
shareholder meeting to oust Akzo’s chairman and pressure the
board to begin negotiations with PPG. As of this writing, the
situation is unresolved. It has been reported that PPG is con-
sidering a public tender offer for PPG’s shares, which in effect
would amount to a hostile takeover, something of a novelty in
the coatings world. That would be a risky undertaking with no
assurance of success, because under Dutch law, Akzo’s board
would retain the right to nominate replacement directors, so the
winning shareholders in a takeover attempt may have less lever-
age than they would if Akzo was based in the U.S.
There also would be intense regulatory scrutiny on a PPG/
Akzo deal. The combined companies would have over $25 bil-
lion in revenues, dwarfing the roughly $16 billion that Sherwin-
Williams/Valspar would have. Its position at the top of the
industry would be secure for the foreseeable future; there is
no single company that Sherwin-Williams/Valspar conceivably
could acquire that would enable it to rival PPG/Akzo in size.
Despite all the drama, none of this should be interpreted as
simply the jockeying of two giant companies vying for bragging
rights of being number one. It’s really all about economies of
scale, and strategies to achieve scale are normal in consolidat-
ing industries. The bigger the company can become, the more
purchasing and pricing power it will have, along with manu-
facturing and distribution efficiencies, the ability to fund new
market initiatives, and the wherewithal to weather economic
downturns. Quite simply, scale makes it easier to keep growing
– something that is very important when the global economy
itself may be growing at only 2 percent to 3 percent a year. CW
References
1. “Enterprise value” refers to the market capitalization, or
the total value of outstanding stock, plus the value of assumed
debt. Sherwin-Williams cash offer was for about $9.3 billion; it would also assume another $2 billion in Valspar’s debt,
resulting in a total enterprise value of $11.3 billion. EBITDA
stands for Earnings Before Interest, Taxes, Depreciation and
Amortization.
Trent Myers is a vice president at Grace Matthews, a Milwaukee-based investment bank providing merger, acquisition and corporate finance advisory services to private and public companies
across the chemical and materials value chain. Myers has been
with Grace Matthews since its 1999 inception and has over 25
years of experience analyzing the chemical industry and its participants, including having performed over 100 business valuations over his career. Myers is the editor of Grace Matthews’
quarterly “Chemical Insights” newsletter.
