Fitch places AkzoNobel rating watch

Fitch places AkzoNobel on rating watch

6:16 AM, 29th April 2017
Fitch places AkzoNobel on rating watch

LONDON, UK: A report from the Fitch Ratings Inc states that it has placed AkzoNobel NV on Rating Watch Negative (RWN) as a long-term issuer default rating (IDR) and a long-term senior unsecured rating of 'BBB+'

The RWN is due to the ongoing takeover interest from PPG Industries and in the case of a further rejection, a proposed separation of its speciality chemicals business and a number of announced measures aimed to return value to shareholders. These include a large special dividend in 2017 and the promise of the return of the majority of proceeds from a future sale/initial public offering (IPO) of the speciality chemicals business to shareholders.

The management has made a commitment to retain the current rating of 'BBB+', and Fitch expects to resolve the RWN over the next few months when there is more clarity around a possible takeover or on the proposed route for the speciality chemicals business and the impact on AkzoNobel's capital structure. The resolution of the takeover or the business separation may take place in six months, with the completion of the separation expected in the next 12 months.

Key rating drivers

PPG industries takeover uncertainty

AkzoNobel has announced it has received a third unsolicited and conditional proposal from PPG Industries of €96.75 per AkzoNobel share which it is currently considering after rejecting two previous offers. A takeover would put pressure on the financial profiles of AkzoNobel and PPG as both companies lack significant financial headroom under current credit metrics for a merger of this size. More information on the future capital structure of AkzoNobel post-takeover would determine its ongoing financial profile and therefore credit rating.

A PPG/AkzoNobel combination would fuse the world's top two paintings and coatings manufacturers, creating a company with around a 20 percent market share. The potential for significant synergies is evident as both entities compete in the same markets with complementary product offerings. Moreover, the merger would boost the leadership positions of the combined company in each of the coatings end-markets, where both companies currently hold the top three global positions.

Business separation pressures financial profile

As an alternative to a takeover from PPG, AkzoNobel has announced it plans to separate and either sell its speciality chemicals business, from its core business of paints and coatings, within 12 months. The majority of proceeds which are currently estimated anywhere between €8bn to €12bn will be returned to shareholders in one way or another, with part of the proceeds also being used to de-risk pension liabilities.

AkzoNobel has also announced an increase in dividends for 2017 from a previously forecast level of around €350 million to €1.6 billion. These shareholder-friendly measures would place pressure on credit metrics and are expected to push FFO net adjusted leverage above its current guideline of 2x in 2017 and over the rating horizon.

Business separation puts pressure on business profile

The business separation of speciality chemicals would also weaken Akzo Nobel's business profile through having a less diverse and smaller business overall. Speciality chemicals provide the highest segment EBITDA margins, as well as exposure to several end-user markets for AkzoNobel that are established and less cyclical. The paints and coatings division is largely exposed to end-markets that remain under pressure, such as construction and oil and gas.

Key assumptions

Fitch's key assumptions within the rating case include:

  • a separation of speciality chemicals business with proceeds distributed to shareholders;
  • a cumulative dividend outflow of EUR1.6 billion in 2017, and approximately EUR0.4 billion thereafter;
  • capital intensity at 4.5 percent;
  • pension contributions of 275 million in 2017, 250 million thereafter.
  • no scenario has been considered under the takeover option due to lack of information.

© Worldofchemicals News 

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