Akzo/Axalta: applying a gloss
Keeping the US company’s managers on board will make the deal more polished
Repair shops use a low-bake oven to harden paint and keep dust away from resprayed cars. Akzo Nobel needs to purify the atmosphere too as it pursues a merger with Axalta Coating Systems, a US group whose coatings adorn many vehicles.
On Monday, the Dutch group confirmed it is in talks on a “merger of equals” with Axalta. Inevitably, the transaction is being viewed by some as a protective coating to ward off US rival PPG Industries. PPG tried and failed to take over Akzo earlier this year, and under Dutch takeover rules could re-enter the fray as early as December.
PPG’s bid for Akzo contemplated $750m of annual cost savings, just under 5 per cent of the target’s historic sales. Applying that percentage to Axalta implies savings of $185m. Taxed and capitalised, they could be worth $1.4bn. But under the merger of equals structure envisaged by Akzo, those savings would have to be shared with Axalta’s shareholders.
The key question is, in what proportion? The answer is complicated by Akzo’s plan to sell or demerge its speciality chemicals business and return any net proceeds to shareholders, leaving a smaller but more focused group. This should go ahead next year, regardless of the outcome of the Axalta talks.
UBS thinks the specialty chemicals sale could fetch €9.2bn. Strip that out and add in Axalta’s undisturbed enterprise value — the shares jumped when deal reports surfaced — and you get a pro forma total of $24.3bn. Based on forecast earnings before interest, tax, depreciation and amortisation before any cost savings, Axalta’s investors should own about 38 per cent of that — equivalent, backing out each company’s most recent net debt figures, to about $24 per share.
That is below Axalta’s $28 share price before the talks became public. Either the rise in Axalta’s shares, already rated higher than Akzo’s, has been over-exuberant or Akzo is set to pay a premium to its own valuation and rely on cost savings to justify it.
One way to assuage the concerns of investors, who would have to vote on any deal, might be to apply the merger of equals logic to the division of boardroom jobs. Axalta’s managers are highly regarded, having raised ebitda margins by about 8 percentage points since 2012. That partly explains the company’s higher multiple. Keeping them on board would make the transaction look more polished.