PPG doubles down on AkzoNobel bid. Can they be brought to the table?

PPG Industries is not going away. Weeks after being rebuffed on its initial takeover proposal by Netherlands-based Akzo-Nobel on 9 March, the US-based coatings company is doubling down.

At a premium of around 40% over AkzoNobel’s share price before the initial offer was publicly reported and rejected, and between 17-19% above the current price (depending on a dividend adjustment), the new proposal may eventually bring AkzoNobel to the bargaining table, even as it has already been rejected.

PPG’s revised offer disclosed on 22 March is €90/share, consisting of €57.50 in cash and 0.331 shares of PPG per AkzoNobel share – up from the initial €83/share (€54 cash, 0.3 shares of PPG).

AkzoNobel noted that the offer is €88.72/share, adjusted for its final dividend and PPG’s share price at the close of 20 March.

AkzoNobel said the revised PPG offer does not address concerns expressed upon the initial approach. These include valuation, high post-deal debt levels, extensive antitrust issues that would require major divestitures, job cuts and a “significant culture gap between both companies”, it said.

Instead, AkzoNobel will focus on separating its specialty chemicals business from its core coatings platform to unlock value, CEO Ton Buchner noted.

PPG CEO Michael McGarry actually cited a “strong cultural fit” with AkzoNobel, with PPG’s strong presence in, and commitment to the Netherlands. PPG has around $4.1bn in annual sales in Europe, with $360m in the Netherlands and several facilities there.

Shares of AkzoNobel closed down 1.1%, to €75.78 in Amsterdam on 22 March after the new offer was announced and rejected. PPG’s shares closed down 0.2%, to $104.25 in New York.

PPG’s revised offer represents an EV/EBITDA (enterprise value/earnings before interest, tax, depreciation and amortisation) multiple of 11.6x for AkzoNobel, based on the target’s 2016 earnings, according to PPG.

That’s solid, but not as robust compared to other deals in the coatings and related sectors. When announced in March 2016, Sherwin-Williams’ planned acquisition of Valspar (yet to close) for $11.3bn was at an multiple of 15.0x estimated 2016 EBITDA at the time, and 10.9x after expected synergies.

Less comparable but still worth noting, Germany-based Evonik’s acquisition of Air Products’ specialty and coatings additives unit completed in January 2017 for $3.8bn was at 15.2x 2016 EBITDA.

Based on an enterprise value of €24.5bn for AkzoNobel and accounting for PPG’s expected synergy target of $750m (and a $/euro exchange rate of 1.074), a back-of-the-envelope calculation yields a post-synergy EV/EBITDA multiple of 8.7x.

VALUATION SCENARIOS

London-based analyst Geoff Haire with UBS previously estimated PPG could pay €92/share, or 4% higher than the current offer. “In our opinion the focus will now be on how Akzo can create shareholder value by splitting coatings and chemicals,” he said.

Haire sees an initial public offering (IPO) of specialty chemicals and a re-rating of the core coatings business implying a fair value of €71/share, while a sale of specialty chemicals at an average multiple of 11.5x estimated 2017 EBITDA yields €84/share (assuming no capital gains tax).

“We believe that Akzo management could then reinvest a large proportion of the proceeds (€8bn-12bn), in coating assets, as part of the rationale for splitting up the group is to ‘allow them (Coatings and Chemicals) to build on their respective leadership positions’,” said Haire.

However, the analyst cautions that “the last 20 years has shown that, in the European chemical industry, a ‘sell and buy’ strategy has been difficult to execute successfully (ie, ICI, Ciba, Rhodia) and to create shareholder value”.

A third option of spinning out the specialty chemicals business to shareholders would imply a fair value of €68/share, not creating any value, he noted.

Clearly AkzoNobel is under more pressure to boost shareholder value. With the offer from PPG still at a sizeable premium to the current stock price, it’s hard to ignore a request to meet and discuss. And based on recent deal multiples in the coatings and wider specialty chemical sector for quality assets, PPG has room to go higher. Might a third bid emerge and bring AkzoNobel to the table?