First, the details of the purchase itself. Sherwin paid a 41% premium to Valspar’s closing price on March 18, 2016, and 28% higher than Valspar had ever traded. The $11.3 billion price tag represents 15 x projected calendar year 2016 EBITDA (earnings before interest, taxes, depreciation and amortization). Sherwin forecasts $280 million in synergies, which would make the purchase price just under 11 x 2016 expected EBITDA. The deal is not expected to close until the first quarter of 2017.
On the face of it, the price was high. Sherwin’s stock was down around 4% on the news, reflecting the large premium it paid. The rough rule of thumb for deals in this space is 8 – 10 x EBITDA, and around 1 – 1.5 x revenue. This deal represents almost 2.6 x Valspar revenue. I like to use revenue multiples as a gut check when evaluating deals as it corrects for big margin differentials. For example, if a company is under-earning, a deal may look expensive on an EBITDA basis, but actually be cheap because the acquirer can make some fixes, boost the margin, and voila, the acquired company is worth a lot more. On a deal with a big EBITDA multiple and a big revenue multiple, it is harder to make the math work (Sherwin trades at 2.4 x revenue).
The Sherwin Williams Valspar merger seems to make strategic sense to me from Sherwin’s perspective, and clearly it is an enormous win for Valspar’s shareholders (not Valspar employees, though). Sherwin’s rationale for the deal is consistent with what we have seen in the hundreds of deals in the coatings sector over the last few years – consolidate the market, expand into new markets (products and geographies), and “synergies” which is fancy corporate speak for fire a bunch of people and close facilities. Valspar gives Sherwin a much bigger international business (50% of Valspar’s business is outside of North America); dramatically boosts Sherwin’s industrial business by expanding into packaging and coil coatings and bolstering their general industrial coatings; vertically integrates them further into resins; and will allow Sherwin to offer more architectural products through their existing store network.
Interestingly, this deal comes in the wake of the large Dow / Dupont merger late last year (http://www.tizecloud.com/coatings/dow-dupont-merger-a-sad-sign-for-our-future/). There have been two other large deals in the broader sector in 2016 already: the $43 billion purchase of Syngenta by ChemChina and the $1.3 bb purchase of Arizona Chemicals by Kraton.
The Sherwin Williams Valspar marks the largest in a multi-year binge of consolidation in the coatings space. Before even looking at Sherwin Williams Valspar merger, competitors in the space have been trading assets for the last decade. PPG in particular has made a series of huge acquisitions (and divestitures), starting in 2008 with the $3.2 bb purchase of SigmaKalon, then the 2013 $1.3 bb purchase of AkzoNobel’s North American Architectural Coatings business, and the $2.3 bb purchase of Comex in 2014. PPG bolstered their industrial business with the purchases of Spraylat in 2012 and IVC in 2015.
Sherwin Williams and Valspar both had on the prowl for acquisitions as of late, though they have been nowhere near as active as PPG. Sherwin failed in its bid for Comex’s main Mexican business and had to settle for the USA / Canadian segment (about 234 US stores and 80 Canadian). Valspar acquired Inver group in June of 2013.
While the deal likely faces antitrust issues, the impact on the coatings industry is transformational. There is now a trifecta of three major global suppliers of almost equal size:
Sherwin Williams Valspar Merger: $15.6 bb in revenue
PPG $15.3 bb of revenue
Akzo €14.9 bb of revenue
The global coatings market is approximately $130 bb in annual revenue. Approximately 43% is architectural (house paint); 28% general industrial, and then a range of other uses. These 3 players will now have about 36% market share.
- Written by Stephen Kawaja