08 April 2016

Paint maker Sherwin-Williams to absorb rival Valspar

Last month paint manufacturer Sherwin-Williams agreed to acquire its competitor Valspar. It made a generous offer of USD 113 per share, which is 35 per cent higher than the target’s close of USD 84 on 18th March, the last trading day prior to the deal being announced. Including debt, Valspar can be valued at approximately USD 11,300 million, making it Sherwin-William’s biggest purchase to date, according to Zephyr, the M&A database published by Bureau van Dijk. To help finance the deal, Sherwin-Williams has obtained bridge financing from Citigroup and will also utilise its cash resources.

Listed on the New York Stock Exchange (NYSE), Minneapolis-headquartered Valspar has been providing paint and coatings to customers since 1806. The company employs more than 11,000 people and operates in over 25 countries, including big markets like China and Australia. With reported net sales of USD 4,393 million in 2015, it claims to be the sixth largest paint and coatings manufacturer in the world.

Also founded in the 19th century, NYSE-listed Sherwin-Williams’ customers include industrial and retail buyers. The company’s paint and coatings (some of its best known brands being HGTV HOME and Dutch Boy) are sold in more than 115 countries around the world through over 4,100 stores and facilities, as well as other third party distributors and retailers.

Valspar’s products are widely available at large retailers, such as Lowe’s and Ace hardware stores. Owning the target will allow Sherwin-Williams to gain better access to do-it-yourself (DIY) painters, who tend to shop at these retailers, rather than independent stores.

Furthermore, with Valspar’s significant presence abroad, the planned merger will also help Sherwin-Williams to diversify its revenue sources, which are currently heavily focused on the US market (accounting for 84 per cent of its total revenue), the Wall Street Journal noted. Commenting on the move, Sherwin-Williams’ newly appointed chief executive, John Morikis, said: "The combination expands our brand portfolio and customer relationships in North America, significantly strengthens our Global Finishes business, and extends our capabilities into new geographies and applications, including a scale platform to grow in Asia-Pacific and EMEA.

The deal was also met with a warm reception at Valspar, whose board has given the green light. Gary Hendrickson, chairman of the target, stated: "We are confident this transaction will create opportunities to accelerate many of the operating initiatives already underway at Valspar.

However, before Morikis can pop the champagne corks, the transaction will need to get past antitrust regulators. Perhaps this is somewhat reminiscent of Sherwin-Williams’ failure to woo regulators during its bid to acquire Comex, which left the buyer with no choice but to withdraw its offer in 2014. The Mexican paint maker was then sold to Sherwin-Williams competitor PPG Industries, rubbing salt into the wound.

Under the terms of the Valspar merger, there are provisions in place to protect Sherwin-Williams’ interests from the demands of antitrust regulators. In the event that both companies are required to offload businesses with revenues more than USD 650 million, the offer price will be reduced to USD 105 per share. Divestitures that exceed USD 1,500 million in revenue would allow the acquiror to terminate the deal. However, both firms seem fairly confident that the transaction will go through without any major selloffs.

Upon closing of the deal, which is expected to take place early next year, the combined entity is set to surpass PPG Industries to become the largest player in the global paint and coatings industry by revenue, according to Sherwin-Williams. Until then, any form of celebration will need to be put on hold for now.

© Zephyr