Recently, the largest global independent paint and coating company, Azko Nobel(NASDAQOTH: AKZOY), announced it will sell its sluggish North American Decorative Paints segment, with 5,000 employees and 8 manufacturing facilities, to its US rival PPG Industries (NYSE: PPG) for around $1.05 billion. The is expected to be closed in the second quarter next year. Is it good for Azko Nobel or PPG Industries, or both? Let’s dig deeper.
For Azko Nobel
The Decorative Paints Americas, including the North American business, with several brands such as Glidden, Dulux, and Coral, has experienced consistent revenue growth from $1.86 billion in 2009 to more than $2.22 billion in 2011. Out of the total $2.22 billion revenue for the Americas region in 2011, North America took the majority ($1.5 billion). The products have been sold to homeowners, professional painters, and commercial contractors as end users via retail chains such as Wal-Mart, Home Depot, and Leroy Merlin. In 2011, Azko Nobel recorded $20.65 billion in revenue; thus, its North American Decorative Paints accounted for around 7% of the corporation’s total revenue.
The company’s CEO, Ton Buechner said:
“Over the past four years, the team has done a great job in turning the North American Decorative Paints business around. I am pleased that we have found a respected company to take over the business. This agreement is a good outcome for all stakeholders.”
The deal would give Azko Nobel around $875 million in cash. As of September 2012, Akzo Nobel booked nearly $10 billion in stockholders' equity, whereas the total short and long-term debt was nearly $5.5 billion. So the net amount that the company received from its North American decorative coating would amount to 8.75% of the total equity.
PPG would have an edge, as it is already the large world’s provider of protective and decorative coatings. This purchase will make the company become the world leader in coatings maker. The second and the third position would belong to Akzo Nobel andSherwin-Williams (NYSE: SHW), respectively. PPG expected to to take advantage of a “prolonged construction market recovery.” With the acquisition, PPG would own 600 AkzoNobel paint stores and a combined network of around 1,000 stores dedicated to North American market. Charles Bunch, the chairman and CEO of PPG, said, “It also complements PPG's national home center strategy by extending our branded paint product offerings to more than 8,000 retail outlets, and finally, it enhances our already strong presence in the independent paint dealer channel.” Bunch estimated that the share buyback program would begin in early 2013, with around $500 million - $750 million.
In fiscal 2011, PPG got nearly $14.9 billion in the total revenue; the acquisition of North American agricultural coatings would add up by 10% of 2011 sales. This would put PPG in more in line in the market of agricultural coating with Sherwin-Williams, which just recently entered an agreement to purchase the Mexico leader in paint in coatings, Consorcio Comex, for around $2.34 billion.
Foolish Bottom Line
As Warren Buffett often says, “The price is what you pay, the value is what you get.” In 2011, Comex had total revenue of $1.4 billion, so the deal valued Consorcio Comex at nearly 1.7x P/S. However, PPG only paid 0.7x P/S. It seems that PPG is getting the bargain; however, the synergy needs to be taken into account as well.