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PPG's $22 billion bid for Akzo Nobel rebuffed

March 10, 2017
Chemical Value Chain

Dutch paints and chemicals maker Akzo Nobel NV said Thursday it had rejected a EUR20.9 billion ($22.1 billion) offer from U.S. peer PPG Industries Inc., setting up a trans-Atlantic standoff between two long-lived industrial giants amid a wave of consolidation in the sector.

Amsterdam-based Akzo also said Thursday that it is exploring selling off its special-chemicals division — a disclosure, it said, prompted by PPG’s unsolicited offer.

Akzo said PPG a week ago offered EUR54 in cash and 0.3 PPG shares for each Akzo share, corresponding to a value of EUR83 a share. Akzo shares increased 13% to EUR72.79 in Thursday trading, while PPG dropped 3.7% to $102.93.

There have been dealings between the two companies before. In 2012, PPG bought Akzo’s North American house-paint business for $1.05 billion, an acquisition that PPG Chief Executive Michael McGarry helped engineer before being promoted to the top spot at the Pittsburgh-based company in 2015.

Akzo, which counts Dulux, Sikkens, Interpon and Eka among its brands, said the bid significantly undervalues the company and that its board unanimously rejected it after a careful review.

PPG, whose brands include Pittsburgh Paints, Olympic and Glidden, confirmed the proposal, saying it continues to believe in the strategic rationale for the deal and that it would now consider its next steps. It said a combination would bring together complementary products and technologies, as well as strengths in different parts of the world.

In December, PPG launched a restructuring program in an effort to save $120 million to $130 million a year because of a slowdown in global demand and weaker-than-expected growth in Europe.

Seaport Global Securities LLC analyst Michael Harrison noted PPG’s struggle to grow, its accumulation of cash and the fact that coatings rival Sherwin-Williams Co. is about to close its deal for Valspar Corp. Combined, those companies would outstrip PPG and Akzo in sales.

PPG’s bid for Akzo is “a strategic response to that,” Mr. Harrison said,

For 2016, PPG recorded net sales of $14.8 billion, flat with the preceding year. Akzo’s revenue fell 4% to EUR14.2 billion.

The offer comes amid a period of consolidation in the chemicals industry. U.S. giants Dow Chemical Co. and DuPont Co. are in the process of completing a $120 billion merger, and have offered to sell businesses to gain approval from the European Union’s antitrust regulator.

Industrial-gas giant Praxair Inc. and Germany’s Linde AG created a combined entity worth $66.6 billion after agreeing to a merger in December.

Other potential tie-ups in the broader chemicals sector include Bayer AG’s planned $57 billion takeover of U.S. agrochemical giant Monsanto Co. and China National Chemical Corp.’s planned $43 billion acquisition of Swiss seed company Syngenta AG.

Akzo Chief Executive Ton Büchner said on Thursday that Akzo has been looking at separating its specialty-chemicals business, including establishing the unit as an independent listed entity. The business, which reported revenue of EUR4.8 billion in 2016, produces a range of chemicals used in construction, industrial and consumer goods.

“The proposal [by PPG] contains serious risks and uncertainties,” Mr. Büchner said in a statement. “I firmly believe that Akzo Nobel is best placed to unlock the value within our company ourselves.”

The spurned offer puts at odds two of the world’s oldest industrial companies. Akzo Nobel was created from the merger of paint and chemicals companies in Sweden and the Netherlands that dated back more than a century. Among them was a chemicals firm founded by Alfred Nobel, who launched the prizes that bear his name. After the merger in 1994, Akzo acquired two of Britain’s oldest paint and chemicals firms.

PPG, founded in 1883 as Pittsburgh Plate Glass Co., was the first U.S. company to successfully market large sheets of glass, until then an expensive rarity. It quickly expanded into chemicals to secure a supply of raw materials and was an early supplier of the automotive and aviation industries.

Mr. Büchner, who took over the top job at Akzo in 2011, has presided over a comprehensive restructuring that has led the company back to profitability. But he has in the past resisted separating the specialty-chemicals unit because it has been the group’s “cash cow,” said Markus Mayer, an analyst with Germany’s Baader Bank.

“The market would love that Akzo would spin off specialty chemicals,” Mr. Mayer said.

Analysts widely expect PPG to raise its offer. Mr. Harrison said Valspar commanded a much higher multiple to earnings than the bid for Akzo. But many obstacles remain to securing a deal.

The bid comes amid concerns by labor groups and others about foreign takeovers of Dutch firms, just ahead of national elections next week. Kraft Heinz Co.’s bid for Anglo-Dutch consumer giant Unilever PLC failed last month in part on similar worries, though price was the main hurdle.

A hostile takeover would be “all but impossible,” according to research firm Olivertree, because Akzo maintains so-called priority shares whose holders can block any major transactions they oppose.

Still, a tie-up would be “credible and potentially powerful,” analysts at Bernstein Bank said.

Analysts at Citigroup agreed but noted that the overlap of some business areas could raise antitrust concerns in Europe.

After a record year of mergers and acquisitions activity in the chemicals industry, consolidation is likely to continue in the sector, Baader’s Mr. Mayer said. He cited a low-growth environment, cheap financing and overcapacity in many markets.

Akzo became one of the world’s largest paint makers after it acquired U.K. rival Imperial Chemical Industries Ltd. in 2008 for GBP8 billion ($12.9 billion). But the Dutch company struggled to digest the debt-financed acquisition, which raised its exposure to Europe’s troubled automotive and construction industries, culminating in a series of profit warnings in 2011. It has since slashed costs and laid off staff.

By Christopher Alessi and Ian Walker

Source: MarketWatch

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