Dutch AkzoNobel moves on from PPG bid, focuses on 2020 targets – CEO

September 13, 2017

AkzoNobel spent a great deal of time thinking about the acquisition bid by US’ PPG in the first half of the year but the company has moved on and is concentrated on achieving its 2020 financial targets, the new CEO of the Dutch paints and coatings major said this week.

Thierry Vanlancker, in the post since June, said the problem with PPG’s bid was the way the US company approached its Dutch peer.

After several rejections and a clear lack of engagement from AkzoNobel, PPG withdrew its bid on 1 June, but the battle took its toll on the company, with both former CEO Ton Buchner and CFO Maelys Castella stepping down for health reasons.

“The problem [with PPG’s bid] was the way the approach was done and the offers [that] were done,” said Vanlancker.

“There is a lot of speculation about what’s going to happen. To be honest, we are spending surprisingly little time internally on it.”

However, chemical analysts expect PPG to approach AkzoNobel again. The US company would be free to come back with a bid from 1 December, as per Dutch law, but some have argued it may prefer to wait until May, when AkzoNobel’s chairman is due to step down. Some analysts have said he was the true opponent to sell to PPG.

AkzoNobel’s activist investor Elliot Advisors was on the opposite side of the spectrum, and during the first half of the year presented a challenge to the company’s management and the way it handled the bid. However, both parties reached a truce in August.

“It [the bid] was very high on the agenda for Antony Burgmans, absolutely, but in the businesses we are doing it didn’t have any impact. Right now, my whole executive team is spending its time in plants like [UK’s] Ashington [and working on] how can we get more competitive and achieve the 2020 targets, so we are not spending much time thinking [about PPG].”

AkzoNobel started up on 12 September a plant to produce paints in Ashington, in the northeast of the UK, for which capital expenditure (capex) stood at “more than €100m”, according to the company, although the CEO would not disclose the exact figure.

However, chemical analysts are starting to think that the 2020 financial targets are already “unachievable” as the company downgraded last week its forecast for earnings before interest and taxes (EBIT) for this year after what it described as a troubled third quarter.

On the same day, AkzoNobel announced a new management structure as well as Castella’s resignation as CFO, following Buchner’s abdication in June. Changes at the top at troubled times just come to add to the woes, said analysts last week.

“We have already been worried about too many things going on at the same time for the company to be successful in its aims – today’s news compounds our fears,” said Bernstein last week.

AkzoNobel’s CEO is however convinced the company will be able to achieve the 2020 financial targets, although it recognised the third quarter of this year had surprised the company with events escaping its own control, which had made 2017 more challenging.

“If you look at paints and coatings [industry], you’ll see a mixed picture around how 2017 is shaping up – we have seen some resets in that market. The first quarter was strong, also in coats and painting, hence the €100m better [EBIT initially forecast]. We were in fact on track to do it until the third quarter,” said Vanlancker.

“In the third quarter we had a string of three key events which have little to do with AkzoNobel.”

The CEO mentioned the four plants the company has in the Houston, Texas, which have been down since Hurricane Harvey made landfall at the end of August and are expected to be down for a month, he said.

A second factor was “a number of environmental inspections” at some of the company suppliers in China, he said, which had affected its production volumes in that country. The Chinese government is currently understood to be launching fresh controls on production in a bid to improve air quality around its cities.

Thirdly, foreign exchange headwinds will “take a hit” on the €100m growth expected for EBIT this year, as the strengthening of the euro against the UK sterling pound and the US dollar has taken its toll when translating earnings in those currencies into euros.

The UK is an important market for AkzoNobel, where it has a 39% of the decorative paints market share, according to its own data.

The country’s currency has lost more than 15% of its value against the euro since voters decided to vote to leave the EU in June 2016 (Brexit), closing trading on Tuesday at £1:€1.11.

Against the US dollar, the pound has lost nearly 11% of its value, trading on Tuesday at £1:$1.33.

At a press conference at the Ashington plant this week, Vanlancker said he was hopeful Brexit-related uncertainty would clear out soon and hoped the negotiations to leave the 28-coutry bloc would bring clarity “relatively soon”.

To fend off the acquisition bid from PPG and calm shareholders, AkzoNobel accelerated the announcement about spinning off its specialty chemicals division, according to Vanlancker in May, when he was precisely the head of that division.

In AkzoNobel’s eyes, the new entity could be valued at a range between €8-12bn, although some analysts have lowered that figure to as low as €6-7bn, a valuation the CEO strongly rejected.

“€8bn [would be] if you value it all as a commodity [chemicals business]; €12bn if you would value it all as specialty, that’s why the market talks somewhere around €10bn. Those are realistic numbers and, if we do the analysis – and banks are cracking that out – there is not much difference between the different scenarios that we have,” said Vanlancker.

AkzoNobel started to build the Ashington plant back in 2012, when the economy in the UK was outperforming peers in the EU and consumer spending was booming. By 2017, the picture has completely changed and, with inflation riding high, consumers are tightening their belts.

Asked whether the company would have chosen Ashington had the decision been made this year, he said that “probably, yes”, adding: “The UK is a big market, a market with a lot of competitive pressure, so this is the place for us to have the most efficient and the most agile plants, like Ashington,” said Vanlancker.

“[Here we have] The best production [methods, together] with big volumes and for a small budget. There is also a historical link with the northeast of the UK.”

The fall in the pound would be compensated, said the CEO, by other factors like the labour cost – salaries in pounds are less costly for the company’s euro-denominated accounts – providing a hedge while raw materials purchased locally offset higher prices for those acquired overseas.

“[We have] a number of globally sourced raw materials, but a lot of it is local. I would say there is a natural hedge in general when you look at labour costs [so] it’s more the translation effect that impacts us.”

By Jonathan Lopez

Source: ICIS News