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AkzoNobel makes case for remaining independent

April 19, 2017
Chemical Value Chain

AkzoNobel has outlined a shift in strategy that it says will “accelerate growth and value creation.” The company, as previously reported, is splitting into two entities, one based on coatings and the other on specialty chemicals.

Separating AkzoNobel’s specialties business, which posted sales of €4.8 billion ($5.1 billion) and Ebit of €629 million in full-year 2016, is expected within 12 months, by a sale or a separate listing. The moves are designed to bolster AkzoNobel’s valuation and thwart a takeover bid from PPG Industries.

Creating two companies is the logical next phase, building on a strong financial and operational foundation developed in recent years, according to AkzoNobel. The move “will generate superior, faster, and more certain value creation than the alternatives and with substantially fewer risks, uncertainties, and social costs,” the company says.

The bulk of the net proceeds from the separation of the specialty chemicals business is to be returned to shareholders, with a special dividend of €1 billion to be paid in November, “reflecting confidence in the planned separation.” In addition, the regular dividend is being increased by 50% to €2.50/share, “reinforcing confidence in the future plan to further drive growth and profitability,” AkzoNobel says.

PPG says, in a statement today, that it continues to believe in the merits of combining the two companies. “PPG believes that AkzoNobel’s new strategic plan will be more risky and create more uncertainty for AkzoNobel stakeholders including employees and pensioners, as AkzoNobel’s revised strategy would create two smaller, unproven companies and result in additional restructuring,” according to PPG statement. “PPG’s proposal would create more value as it provides an immediate cash payout far in excess of AkzoNobel’s special dividend and is supplemented with PPG shares.”

AkzoNobel says that, after the separation, it will focus on the decorative paints and performance coatings businesses to “accelerate sustainable growth and profitability.” The company aims to make annualized savings of €150 million from continuous improvement programs in those businesses, and an additional cost saving of €50 million is expected from the separation of the specialty chemicals business. An investment of €1 billion will be made in R&D by 2020 “to maintain focus on innovation and new product development.”

The company expects full-year 2017 Ebit to be about €100 million higher than the €1.5 billion reported in 2016, on the back of “significant growth momentum across all business areas.” AkzoNobel, meanwhile, has increased its financial guidance and shifted its target date to 2020. The paints and coatings business is expected to achieve return on sales (ROS) of 15% and a return on investment (ROI) above 25% by 2020; and the specialty chemicals business is expected to make an ROS of 16% and an ROI above 20%, AkzoNobel says. The company’s previous guidance was for a group ROS of 9-11% and a group ROI of 13-17% for 2016-18.

Analysts say the revised targets are ambitious. Jeremy Redenius at Bernstein (London) says the targets translate to a valuation of €85-93/share for AkzoNobel, compared with PPG’s latest bid of about €90/share, which AkzoNobel rejected. The targets are “a huge stretch,” although the extra cash return is “promising,” Redenius says.

A commitment to substantial shareholder returns “reinforces our belief that the plan we are outlining today will create a step change in value creation, generating significant shareholder value in the short, medium, and long term,” says Ton Büchner, CEO at AkzoNobel. “It will be delivered at pace, with a clear timeline, and is in the best interest of all stakeholders …. The performance and outlook of our specialty chemicals business gives us the confidence to return proceeds to shareholders in advance of the separation,” Büchner says. “In addition, we see extensive growth momentum in our paints and coatings business, which we expect to keep growing faster than market rates, allowing us to improve our long-term financial guidance. Now is the right time to create two focused, high-performing businesses. This strategy will create substantial value for shareholders with significant[ly fewer] risks and uncertainties compared [with] alternatives.”

PPG argues that it has a track record of delivering superior shareholder returns over the last five- and ten-year periods. “We believe past performance remains the best predictor of future performance,” PPG says. “We’ve not heard anything today that changes our belief in the value of combining the two companies, and now is the time for a complete review and full consideration of our compelling offer to combine PPG and AkzoNobel. We will be stronger together.”

By Michael Ravenscroft

Source: Chemical Week

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