Akzo-PPG deal would make sense, pressure to perform good for investors – Bernstein

LONDON (ICIS)–A merger between PPG and AkzoNobel would be “credible and potentially powerful” but higher pressure for the Netherlands-based company to perform after rejecting a takeover bid is also good news for shareholders, analyst Bernstein said on Thursday.

AkzoNobel announced plans to review strategic options for the separation of its specialty chemicals business on Thursday after rebuffing an unsolicited takeover bid by its US-headquartered rival.

There would be strong advantages for both parties in the event of a merger, Bernstein said, combining the two global leaders in a fragmented market with estimated $600m of annual savings – 2% of sales for a combined company – and limited decorative paints sector divestitures likely to be required.

However, the rejection of the takeover bid places greater pressure on Akzonobel to perform as a standalone entity, which is good news for shareholders, Bernstein said.

The announcement by AkzoNobel of plans to spin off its specialty chemicals division, representing around 40% of the company’s earnings before interest, taxes, depreciation and amortisation (EBITDA), is a first step in that process, Bernstein added.

“We expect management will continue to deliver operational improvements while shifting focus to profitable growth… volume growth, especially in EU, will be a positive catalyst for stock re-rating,” Bernstein said in an investor note.

“We could see the merit of a tie-up with PPG, which is feasible in our view. Alternatively, AkzoNobel will now be under greater pressure to perform,” the researcher added.

A sale of spin-out of specialty chemicals operations would re-position AkzoNobel as a pure-play paints and coatings player.

Hiving off that part of the business would allow for greater focus and investor clarity on AkzoNobel’s different divisions, according to company CEO Ton Buchner.

“We are reviewing strategic options to separate it from the company to create focus for both Specialty Chemicals and the Decorative Paints and Performance Coatings group, allowing them to build further on their respective leadership positions,” he said.

AkzoNobel’s specialty chemicals operations represented its strongest-performing division in the fourth-quarter 2016, with earnings before interest and taxes (EBIT) rising 31% year on year to €118m.

Over the same period, decorative paints EBIT rose 11% to €51m and performance coatings earnings fell 21% drop to €152m.