The mergers and acquisitions market just got a bit more colorful. Sherwin-Williams and Valspar, two of the nation’s biggest paint companies, agreed to merge in an $11.3 billion deal.
Ben McLannahan and James Fontanella-Khan of The Financial Times had the day’s news:
Sherwin-Williams and Valspar, two of the biggest names in the US paint industry, have agreed to merge in a $11.3 billion deal, in a move that will be seen as a boost for merger and acquisitions activity amid a drop in global activity since the beginning of the year.
Sherwin-Williams, based in Cleveland, said on Sunday that it would pay $113 per share in an all-cash deal for Valspar, a smaller, Minneapolis-based rival. The deal, which was unanimously agreed by directors on both sides, represents a premium of about 41 per cent to Valspar’s average share price, weighted for volume, over the past 30 trading days.
In a joint press release, the companies described their “highly complementary” product line-ups in paints and coatings, and said that the tie-up would result in annual cost savings of $280 million. Pro forma revenues for the combined company last year would have come to $15.6 billion, with adjusted earnings before interest, tax, depreciation and amortization — after those savings — of $2.8 billion.
John Morikis, president and chief executive of New York-listed Sherwin-Williams, which until last week had a market capitalization about four times bigger than Valspar’s, said that the target was an “excellent strategic fit”.
The deal “expands our brand portfolio and customer relationships in North America, significantly strengthens our global finishes business and extends our capabilities into new geographies and applications, including a scale platform to grow in Asia-Pacific and Emea,” he said.
Christopher Rugaber of the Associated Press detailed what each company brings to the table:
Sherwin-Williams said Sunday that it is paying $113 a share in cash, a 35 percent premium to the closing price of Valspar’s stock Friday. It valued the deal at $11.3 billion including the assumption of about $2 billion in Valspar debt.
The combined company would employ 58,000 people and would have had revenue of $15.6 billion last year.
John Morikis, president and CEO of Sherwin-Williams Co., said the deal will enable the companies to save $280 million annually within two years by cutting administrative expenses and raw-material costs. The savings should reach $320 million in the long-run, he said.
Last year, just 16 percent of Sherwin-Williams’ sales were from outside the U.S. The Valspar purchase would push that figure to 24 percent, the company said in a presentation to investors.
Valspar also sells coatings to packaging companies, and to manufacturers of industrial appliances and heating and air conditioning equipment.
Sherwin-Williams will remain headquartered in Cleveland, but said the combined companies will maintain a “significant presence” in Minneapolis, where Valspar Corp. is based.
Sherwin-Williams manufacturers and sells paints and coatings under its own name and brand names such as Minwax, Dutch Boy and Thompson’s Water Seal. It operates more than 4,100 of its own stores and sells in big home-improvement chains like Lowe’s and Home Depot.
Dana Mattioli, Liz Hoffman and James R. Hagerty of The Wall Street Journal explained just how large the combined company will be:
The combined Sherwin and Valspar would have had coatings sales last year of about $15.6 billion, outstripping rival PPG Industries Inc.’s $14.2 billion and Amsterdam-based AkzoNobel NV’s $11.1 billion, according to Sherwin.
The global coatings market—including paint and coatings used on cars, ships and myriad other products—generates about $130 billion of sales a year, according to PPG.
No decision had been made on whether Gary Hendrickson, chairman and CEO of Valspar, would stay with the combined company, Mr. Morikis said.
Sherwin valued the Valspar deal at $11.3 billion, including the assumption of debt.
The deal includes an unusual cut to the purchase price should antitrust regulators demand aggressive divestitures. If Sherwin is forced to sell businesses representing more than $650 million of Valspar’s 2015 revenue, the price drops by $8 a share. Sherwin could walk away entirely if divestitures climb to $1.5 billion of revenue, a provision that is more common.
The potential price cut is a nuanced way to handle antitrust risk, which is usually dealt with more bluntly with all-or-nothing walkaway rights and termination fees.
But it means Valspar shareholders likely would be voting on a deal without knowing for sure how much they would get paid, which could complicate approval.
The companies said they believe there is minimal risk of antitrust pushback and that the provisions “provide Sherwin-Williams and Valspar with greater closing certainty.”
Sherwin said it expects the deal to immediately add to earnings, excluding one-time costs, and projected $280 million in annual synergies, which normally come from cutting overlapping expenses.
