AkzoNobel moves on from PPG, focuses on 2020 targets

AkzoNobel spent a great deal of time thinking about the acquisition bid by the US’s PPG in the first half of the year, but the company has moved on and is concentrating on achieving its 2020 financial targets, the new CEO of the Dutch paints and coatings major said in mid-September.

Thierry Vanlancker, in the post since June, said the problem with PPG’s bid was the way the US company approached its Dutch peer. After several rejections and a clear lack of engagement from AkzoNobel, PPG withdrew its bid on 1 June, but the battle took its toll on the company, with former CEO Ton Buchner and CFO Maelys Castella stepping down for health reasons. “The problem [with PPG’s bid] was the way the approach was done and the offers [that] were done,” said Vanlancker. “There is a lot of speculation about what’s going to happen. To be honest, we are spending surprisingly little time internally on it.”

However, chemical analysts expect PPG to approach AkzoNobel again. The US company would be free to come back with a bid from 1 December, as per Dutch law, but some have argued it may prefer to wait until May, when AkzoNobel’s chairman is due to step down. Some analysts have said he was the true opponent of selling to PPG.

AkzoNobel’s activist investor Elliott Advisors was on the opposite end of the spectrum, and during the first half of the year presented a challenge to the company’s management and the way it handled the bid. However, both parties reached a truce in August.

“[The bid] was very high on the agenda for [AkzoNobel chairman] Antony Burgmans, absolutely, but in the businesses we are doing, it didn’t have any impact. Right now, my whole executive team is spending its time in plants like [the UK’s] Ashington [and working on] how can we get more competitive and achieve the 2020 targets, so we are not spending much time thinking [about PPG].”

AkzoNobel on 12 September started up a plant to produce paints in Ashington, northeast England, for which capital expenditure (capex) stood at “more than €100m”, according to the company, although the CEO would not disclose the exact figure. However, chemical analysts are starting to think that the 2020 financial targets are already “unachievable” as the company downgraded last week its forecast for earnings before interest and taxes (EBIT) for this year after what it described as a troubled third quarter.

TROUBLE AT THE TOP

On the same day, AkzoNobel announced a new management structure as well as Castella’s resignation as CFO, following Buchner’s resignation in June. Changes at the top at troubled times just add to the woes, said analysts. “We have already been worried about too many things going on at the same time for the company to be successful in its aims – today’s news compounds our fears,” said Bernstein.

AkzoNobel’s CEO is, however, convinced the company will be able to achieve the 2020 financial targets, although it recognised the third quarter of this year had surprised the company with events escaping its own control, which had made 2017 more challenging.

“If you look at [the] paints and coatings [industry], you’ll see a mixed picture around how 2017 is shaping up – we have seen some resets in that market. The first quarter was strong, also in coats and painting, hence the €100m better [EBIT initially forecast]. We were in fact on track to do it until the third quarter,” said Vanlancker.

“In the third quarter we had a string of three key events which have little to do with AkzoNobel.”

The CEO mentioned the four plants the company has in Houston, Texas, which have been down since Hurricane Harvey made landfall at the end of August and are expected to be out of action for a month.

INTERNATIONAL CHALLENGES

A second factor was “a number of environmental inspections” at some of the company suppliers in China, he said, which had affected its production volumes in that country. The Chinese government is understood to be launching fresh controls on production in a bid to improve air quality around cities. Thirdly, foreign exchange headwinds will negatively impact the €100m growth expected for EBIT this year, as the strengthening of the euro against the UK pound sterling and the US dollar has taken its toll when translating earnings in those currencies into euros.

The UK is an important market for AkzoNobel, where it has a 39% of the decorative paints market share, according to its own data. The country’s currency has lost more than 15% of its value against the euro since voters decided to vote to leave the EU in June 2016. Against the US dollar, the pound has lost nearly 11% of its value.

At a press conference at the Ashington plant, Vanlancker said he was hopeful Brexit-related negotiations would bring clarity “relatively soon”.

To fend off the acquisition bid from PPG and calm shareholders, AkzoNobel accelerated the announcement about spinning off its specialty chemicals division, according to Vanlancker in May, when he was the head of that division.

In AkzoNobel’s eyes, the new entity could be valued at €8bn-12bn, although some analysts have lowered that figure to as low as €6bn-7bn, which the CEO strongly rejected.

“€8bn [would be] if you value it all as a commodity [chemicals business]; €12bn if you would value it all as specialty – that’s why the market talks somewhere around €10bn. Those are realistic numbers and, if we do the analysis – and banks are cracking that out – there is not much difference between the different scenarios that we have,” said Vanlancker. AkzoNobel started to build the Ashington plant in 2012, when the UK economy was outperforming its peers in the EU and consumer spending was booming. By 2017, the picture has completely changed and, with inflation high, consumers are tightening their belts.

Asked whether the company would have chosen Ashington had the decision been made this year, he said “probably, yes”, adding: “The UK is a big market, a market with a lot of competitive pressure, so this is the place for us to have the most efficient and the most agile plants, like Ashington,” said Vanlancker.

“[Here we have] the best production [methods, together] with big volumes and for a small budget. There is also a historical link with the northeast of the UK.”

The fall in the pound would be compensated, said the CEO, by other factors like labour costs – salaries in sterling are less costly for the company’s euro-denominated accounts – providing a hedge, while raw materials purchased locally offset higher prices of those acquired overseas.

“[We have] a number of globally sourced raw materials, but a lot of it is local. I would say there is a natural hedge in general when you look at labour costs [so] it’s more the translation effect that impacts us.”