Breakingviews: PPG will struggle to paint by Akzo Nobel numbers

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By Jeffrey Goldfarb | NEW YORK

NEW YORK (Reuters Breakingviews) – PPG Industries
will struggle to paint by Akzo Nobel’s numbers. The
Pittsburgh-based maker of Glidden and other coatings and
chemicals is deciding whether to improve on an offer to buy
Dutch competitor Akzo Nobel after an unsolicited $22 billion
entreaty was firmly rejected. To make the deal stick requires
some ultra-glossy cost savings (see calculator tmsnrt.rs/2msqtWd).

The brisk pace of consolidation throughout the industry may
be intensifying PPG’s desire to get bigger. Domestic paint
rivals Sherwin-Williams and Valspar are putting
the finishing touches on their merger after a lengthy antitrust
review as Dow and DuPont trudge through the
complications of their $130 billion chemical romance.

Akzo Nobel suggests the solution is to get smaller. In
response to PPG’s cash-and-stock offer, which it derided as too
low, the company accelerated plans to figure out how it might
separate its specialty chemicals arm. To win over a board also
shielding itself with claims of responsibility to customers,
employees and societies means PPG will have to woo shareholders
with a more generous premium.

By some metrics, it has room to maneuver. Start with the
assumption that PPG will at a minimum want to cover Akzo Nobel’s
cost of capital, which Morningstar analysts put at 8.3 percent.

Suppose PPG raises its offer from 83 euros a share to 90.
Akzo Nobel is expected by analysts to generate about 1.6 billion
euros of earnings before interest and tax in the coming year.
Taxing them at 25 percent and dividing the resulting net
operating profit after tax by the deal’s approximately 25
billion-euro enterprise value yields a return on investment of
4.8 percent, according to Breakingviews calculations.

So to make the numbers work, PPG Chief Executive Michael
McGarry would need to find about 1.2 billion euros of cost
savings. That would amount to 8 percent of Akzo Nobel’s sales.
Over nearly two decades of chemical-industry acquisitions,
buyers on average have found synergies equal to about 6.8
percent of a target’s revenue, according to a presentation last
year by Axiall related to its own sale to Westlake.

Considered another way, achieving the return hurdle would
mean hacking out 4.6 percent of some 25 billion euros in
combined PPG and Akzo Nobel costs. That proportion far exceeds
Sherwin-Williams’ expectations but would be on par with what the
Dow and Westlake deals envision, according to Morningstar. For
PPG shareholders anything less would be corrosive.

On Twitter twitter.com/jgfarb

CONTEXT NEWS

– PPG Industries, a U.S.-based maker of paints and coatings,
confirmed on March 9 that it had made a takeover bid for Dutch
rival Akzo Nobel, after its target disclosed and rejected what
it said was a cash-and-stock offer valued at 83 euros a share
worth about $22 billion.

– Akzo Nobel said it would “unlock value” instead by
spinning off its chemicals business.

– PPG said it would “carefully evaluate and consider its
position and path forward related to its proposal.”

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)



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