Paint 2017-18: The movie
Plenty of drama in the land of TiO2
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Watching AkzoNobel fend off the advances of PPG is the corporate equivalent of a Hollywood blockbuster
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For a business whose level of excitement has been oft-compared (unfairly) to the activity of watching its chief product dry, the paint industry has embarked on some pretty exciting activities over the past year. At times it has seem to come close to one of those fraught big family movie dramas of tangled marriages and divorces.

What really kicked off the current situation was the move by US paint company Sherwin Williams to merge with fellow US paint and industrial coatings company Valspar, announced in March 2016, and completed in June 2017. That had been (in part) triggered by Sherwin William paints displacing some Valspar paints in US-based big box home improvement retailer Lowe's Home Improvement stores in early 2016.

That merger created a company that was comparable in size to the two other leading companies in the market, the US-based PPG and the Dutch-based AkzoNobel. PPG, partly in reaction to that move, then began a process of attempting to acquire AkzoNobel, which would have created the world's largest paint and coatings company. The first proposal was made in March 2017, and offered a 30% premium on the company's share price at the time, with a total valuation of EUR22.4 billion. This was rejected, so PPG made a second bid with some improvements in conditions. Again, this was rejected. PPG made a third big, this time for EUR26.0 billion, which represented a 50% premium on AkzoNobel's share price from the previous March - and, yes, it was rejected as well.

In the midst of this, AkzoNobel's CEO, Ton Büchner, resigned, citing health reasons. He was replaced by Thierry Vanlancker.

There were a number of consequences that flowed from all this. The one that most recently came to fruition was the resignation of AkzoNobel chairman Antony Burgmans on 26 April 2018. He has been replaced by Nils Andersen, former CEO of the Danish shipping-to-oil conglomerate AP Moller-Maers and Carlsberg, the Dutch brewer.

Mr Burgmans led the company's opposition to the takeover by PPG, a role which put him at odds with many investors in AkzoNobel, in particular the US-based hedge fund Elliot Management, which brought a court case to force AkzoNobel to consider the takeover offers (which it lost), and to oust Mr Burgmans. A key part of Elliot's argument was that the Dutch resistance was hypocritical, as AkzoNobel itself had grown through acquisitions, most notably of the Swedish based Nobel, and the UK-based ICI.

PPG's offer for AkzoNobel took place immediately before a hotly contested Dutch election, and it led to calls for legislation to be enacted which would have introduced a mandatory one-year "cooling down" period for any foreign company attempting to take over a Dutch-based one. However, the law was widely ridiculed by academics and others, who pointed out that it would have a strongly negative effect on the business environment and economy of Holland.

The real ongoing legacy of all this, however, has been a series of promises made by Mr Büchner prior to his resignation regarding a series of reforms AkzoNobel would undertake. The purpose of those promises was to present the company as one that could produce the same level of shareholder return as would have been generated by simply accepting one of PPG's offers. To quote from an article published in The Economist newspaper on 22 April 2017, entitled: "AkzoNobel, under siege, makes unrealistic promises about growth":
The future for AkzoNobel is dazzling - if you believe Ton Büchner, its chief executive. The boss of the Dutch paint-and-coatings firm reported a solid set of quarterly earnings on April 19th, then promised a new era of rapid growth and investments. Shareholders are to get lavish dividends this year. The firm will break up its ungainly conglomerate structure. A speciality-chemicals part of the business will be sold or listed separately next year.
Mr Büchner has no choice but to talk things up, if he is to justify rebuffing two recent takeover offers from a similar-sized American rival, PPG.
Akzo's promises were welcome. But like a newly opened tin of paint, they made some heads spin. After years of eking out smallish gains mostly through cost-cutting, the firm is suddenly to boom. Akzo had previously forecast that returns on sales would be 11% by 2018, already well over its average of less than 9% since 2008; now the CEO promises a rate of 14% by 2020. The firm, which had revenues of EUR14.2 billion in 2016, has emerged from a difficult period. It bought Britain's Imperial Chemical Industries (ICI), the owner of Dulux paint and other products, a decade ago, absorbing it as Europe fell into a slump. The group's recovery since looks solid, but not of the sort to match Mr Büchner's bold targets. "It is a huge stretch, it looks really tough," is the verdict of Jeremy Redenius of Sanford C. Bernstein, a research firm.

To carry on the cinematic comparison, if you were looking for an analogy for the way AkzoNobel has behaved for the past 12 months, a good one would be one of those chase scenes from a thriller movie. You know the ones, where a protagonist is chased down alleyways and through buildings, all the time knocking over file cabinets, slamming doors, rolling out garbage dumpsters in an effort to impede the progress of his or her pursuers, usually to little or no avail.

AkzoNobel's version of this has included moves such as a mooted merger with US-based paint company Axalta, an effort which eventually failed on 21 November 2017. Had AkzoNobel completed that merger, it would have ended any effort by PPG to acquire it, as Axalta pursues many of the same markets as PPG, and the anti-trust complications alone would have caused it to fail.

Then there is the sale of Specialty Chemicals to The Carlyle Group and GIC for EUR10.1 billion. Though with that move, some of the double-bind the company finds itself in is evident. In order to keep its shareholders satisfied, it is going to return the profits from that sale to them, which means it can't use those funds to leverage acquisitions, or fund its restructuring program.

Meanwhile, AkzoNobel's results for its 2017 were somewhere between "flat" and "dismal", depending on which analysts you read, and it has followed that up with a first quarter for 2018 that also missed expectations.

In its results the company promotes the many changes and new things it is creating, while downplaying these results as the consequence of "temporary headwinds", brought about by currency fluctuations and raw material price increases - headwinds which most of the rest of the industry seemed to have little trouble predicting.

We all know how these chase scenes typically end: the three-metre high wire fence you can't climb over. In AkzoNobel's case, that is likely to be its 2018 results. We'll have to wait and see.

Finally, of course, no movie is ever complete without that final twist, which in this case is a scandal that has broken out at PPG. It seems that financial reporting guidelines have been breached by its financial controller, Mark Kelly (allegedly), who has subsequently been dismissed by the company. Initially the error were thought to be limited to its first quarter report for 2018, where its net income before taxes had been overstated by USD7.8 million. Further investigation indicates that there were further errors amount to USD2.1 million for the second quarter of 2017, and USD4.7 million in the fourth quarter of 2017. As they say (truthfully) in the movies, it's the sort of thing that could happen to anybody.

As for Sherwin Williams, the company has now succeeded in pushing some PPG paints out from Lowe's, though the home improvement retailer will continue to stock many of the other great products PPG makes, such as the very popular Liquid Nails. And in "turnabout is fair play", PPG has likewise displaced some Lowe's wood stain products from the archrival of Lowe's, The Home Depot.

Sherwin Williams also enjoyed strong improvements in its overall numbers due to the consolidation of results from Valspar operations. Even without that extra, however, the company recorded good results both for 2017 and the first quarter of 2018. In the words of John G. Morikis, chairman, president and chief executive officer:
2017 was a year of record sales, net income, earnings per share, cash and EBITDA, but it will best be remembered as the year in which we joined forces with Valspar. The enormous amount of effort and energy invested over the past seven months in bringing these two great companies together, strengthening our customer relationships, defining the right organisational structure and building momentum in every line of business is transforming Sherwin-Williams into a faster growing, financially stronger and more profitable enterprise. These efforts will continue throughout 2018 with similar effect.

This is the first in a series of four articles on the paint category. To read the other three, please download our HI News PDF magazine by clicking/tapping on the following link:
HI News Vol.4 No.4: Paint 2017-18: The movie
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