FT Lex : Akzo Nobel/PPG: paint feint Premium

Akzo Nobel/PPG: paint feint
Split could yield more value than bid at current level

Call it the Unilever defence. A foreign bidder comes calling. The target slams the door shut, bemoaning the price and the risks. For good measure, it invokes the national interest plus obligations to other stakeholders, then spikes the acquirer’s guns by saying it will pursue a similar strategy.

The 30 per cent premium offered by US coatings group PPG for its Dutch rival Akzo Nobel was higher than the 18 per cent that Kraft Heinz pitched to Unilever’s shareholders. Even so, this was an easy deal to reject, which Akzo Nobel did publicly on Thursday. There is some overlap in market positions, suggesting antitrust scrutiny was likely. The combined company would, initially at least, have been fairly highly geared. There would have be a political backlash in the Netherlands.

PPG would likely not have wanted Akzo Nobel’s specialty chemicals business, and selling it on might have helped reduce leverage. Akzo Nobel says it will now pursue a separation of the unit itself, something it may have been planning to announce at a capital markets day later this year.

One likely consequence would be to raise the valuation ascribed to its shares. Akzo Nobel has no particular need to raise cash, so assume it distributes shares in its speciality chemicals unit to its own investors rather than selling it. On the basis of peers such as Clariant and Lanxess (itself a spin-off from Bayer in 2005), Akzo Nobel’s specialty chemicals division might attract an enterprise value of about €7.5bn. Applying the higher valuations commanded by pure-play paints and coatings businesses to Citi’s estimates suggests that unit might be worth €17.7bn. Add the two together, back out the existing debt and an implied share price of €94 emerges.

That is comfortably ahead of the €83 value of the PPG bid and — absent a higher offer — would vindicate chief executive Ton Büchner’s decision to send the Americans packing.

Such financial engineering is all very well, but it does not fix Akzo Nobel’s key operating issue: lack of revenue growth. Paint volumes grew 3 per cent last year, coatings were flat. Group revenues have barely shifted in a decade, although profits have improved thanks to Mr Büchner’s focus on costs and returns, and the dividend is rising again after a cut in 2009.

Akzo Nobel bought BASF’s coatings business last year for €475m. It may have to step up its acquisition plans if it is to see off future predators.

>>> ECB President Mario Draghi Press Conference; Seeing cyclical recovering gain

ECB President Mario Draghi Press Conference; Seeing cyclical recovering gaining momentum;
  • Non-Standard measures- Will continue to make purchases at the current monthly pace of EUR 80 bln; April and beyond will be EUR 60 bln as previously announced; will continue until inflation objectives met.
  • Seeing a pass through on the credit creation; supports firm recovery in European economy.
  • Seeing cyclical recovering gaining momentum;
  • Headline inflation has increased largely due to energy and food; underlying remains subdued.

>>> US Early premarket gappers

Early premarket gappers
Gapping up: APRI +32.7%, VVUS +26.9%, OCRX +20.9%, ELF +16.8%, NWPX+11.3%, SMTC +6.4%, SHLD +5.6%, CMTL +4.7%, ERJ +4.6%, HIMX +4.4%, PXLW+3.9%, FOLD +3.9%, RAD +3.2%, GNC +3.1%, MUX +2.7%, ERII +2.3%, BBVA+2.2%, JONE +2.2%, CRIS +2%, KEYW +1.9%, DB +1.8%, SHLO +1.7%, GMS+1.6%, UNFI +1.5%, NOK +1.4%, VRX +1.3%, ERIC +1.3%, IMOS +1.3%, SAN+0.9%, SIG +0.9%, PLUG +0.9%, SSYS +0.9%, INAP +0.9%, TTPH +0.8%, SXE+0.7%, PRTY +0.7%, CS +0.6%

Gapping down: TLRD -29%, HZN -21.9%, RATE -15.5%, NSYS -12.1%, CGNT-11.8%, SPPI -10%, WATT -6.9%, VNET -6.7%, CWH -4.8%, PCOM -4.6%, FRO-4.5%, BCRX -4.3%, HEAR -4.3%, TVIA -3.8%, PLNT -3.6%, FGP -3.4%, RIG-3.2%, SBGL -3.2%, CHK -2.8%, BETR -2.8%, SFS -2.8%, CDE -2.7%, CSTM -2.7%,NE -2.6%, TGTX -2.5%, VALE -2.5%, IGT -2.5%, ESV -2.4%, AU -2.3%, TNDM-2.3%, BBL -2.2%, FCX -2.2%, BHP -2.2%, X -2.1%, GFI -2%, COKE -2%, RDS.A-1.9%, SPLS -1.9%, RIO -1.8%, HMY -1.8%, MRO -1.8%, DVN -1.8%, CLF -1.8%,PBR -1.7%, RUN -1.7%, TOT -1.4%, AA -1.4%, XXII -1.1%

>>> US Gapping up

Gapping up
In reaction to strong earnings/guidance:
  • VVUS +24%, BETR +21.8%, ELF +21.1%, NWPX +11.3%, SMTC +10.8%,SHLD +6.8%, CMTL +4.7%
  • ERJ +4.1%, PRTY +3.9%, GMS +3.8%, SKIS +3.3%, UNFI +3.1%, ERII +2.3%,CRIS +2%
  • KEYW +1.9%, (ALSO KEYW Holding signs a definitive agreement to acquire Sotera Defense Solutions in an all-cash transaction valued at approx. $235 miln)
  • IMOS +1.9%, BSTG +1.7%, INAP +0.9%
M&A news:
  • CNQ +2% (purchases Canadian Sands Assets from MRO and Shell), .
Other news:
  • APRI +24.1% (completes sale of its ex-U.S. assets and rights related to Vitaros to Ferring International; co will retain its Vitaros rights in the U.S. and it remains on track to re-submit the Vitaros NDA to the FDA in the third quarter of 2017)
  • OCRX +20% (rebounding after yesterday's decline)
  • PXLW +3.9% (following late move higher)
  • FOLD +3.9% ( commences the commercial launch of the precision medicine Galafold in Italy following the final publication of reimbursement guidelines by the Ministry of Health ), RAD +3.7% (rebounding after yesterday's decline)
  • GNC +3.1% (Chief Innovation Officer disclosed purchase of 29500 shares worth approx $230K)
  • KEYW +1.9% (KEYW Holding signs a definitive agreement to acquire Sotera Defense Solutions in an all-cash transaction valued at approx. $235 miln)
  • AIG +1.9% (announced President and CEO Peter D. Hancock plans to resign)
  • VRX +1% (launches an offering of $2.5 bln senior secured notes in 2 tranches )
Analyst comments:
  • HIMX +3.1% (upgraded to Buy at Mizuho)
  • .XOG +2.1% (upgraded to Buy from Neutral at Citigroup)
  • ERIC +2% (upgraded to Buy at Goldman)
  • TEF +1% (upgraded to Buy from Hold at Deutsche Bank)

>>> Janus - Bill Gross March Inv. Outlook. : Show Me The Money (see attached)

Show Me The Money

“School days” inexorably continue at the Gross household, not just because of grandchildren,
but because of the necessity to teach my own kids the complexities and pitfalls of investing.
As I get older, I fear I may unduly introduce them to a 1930s Will Rogers warning about
losing money: “I’m not so much concerned about the return on my money,” he wrote, “but the
return of my money.” “Don’t lose it” is my first and most important conceptual lesson for them
despite the Trump bull market and the current “animal spirits” that encourage risk, as opposed
to the preservation of capital.
Recently I also explored with them the concept of financial leverage – specifically that of
fractional reserve banking, which has been the basis of credit and real economic growth
since the system was blessed by central banks over a century ago. “It still mystifies me,” I
told them, “how a banking system can create money out of thin air, but it does.” By rough
estimates, banks and their shadows have turned $3 trillion of “base” credit into $65 trillion +
of “unreserved” credit in the United States alone – Treasuries, munis, bank loans, mortgages
and stocks too, although equities are not officially “credit” they are still dependent on the cash
flow that supports the system.
But I jump ahead of myself. “Pretend,” I told the “fam” huddled around the kitchen table, that
there is only one dollar and that you own it and have it on deposit with the Bank of USA – the
only bank in the country. The bank owes you a buck any time you want to withdraw it. But the
bank says to itself, “she probably won’t need this buck for a while, so I’ll lend it to Joe who
wants to start a pizza store.” Joe borrows the buck and pays for flour, pepperoni and a pizza
oven from Sally’s Pizza Supplies, who then deposits it back in the same bank in their checking
account. Your one and only buck has now turned into two. You have a bank account with one
buck and Sally’s Pizza has a checking account with one buck. Both parties have confidence
that their buck is actually theirs, even though there’s really only one buck in the bank’s vault.