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.