Players seek more growth through consolidation
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Players seek more growth through consolidation

5:18 AM, 9th April 2018
Players seek more growth through consolidation
Paints and coatings are designed for protection, but the primary property of a coating is protective, while paints are also designed for color and visual appeal. (File photo)

By Vir Lakshman

Like most of today’s chemical industry, the paints and coatings sector is going through a period of major consolidations to support growth, increase efficiencies and gain greater leverage with suppliers and customers. In 2017, Sherwin-Williams, a leading US paint maker, agreed to pay a record $11.3 billion for its rival Valspar, and PPG made repeated attempts to acquire AkzoNobel before ending its pursuit. More deals are expected in 2018. The question is whether consolidation will remain a viable growth strategy for this sector in the face of volatile prices, anti-monopoly laws, nationalistic concerns, and other factors worldwide.

To protect and beautify

When we talk about paints and coatings, it helps to remember that the two are similar-but-different. Both paints and coatings are designed for protection, but the primary property of a coating is protective, while paints are also designed for color and visual appeal. Paints and coatings can be divided by resin (acrylic, alkyd, epoxy, polyurethane, polyester) or technology (water-based, solvent-based, high solids, and powder).

In terms of applications, paints and coatings fall into three broad categories:

Architectural products make up the largest segment of the paints and coatings market, about 45 percent. These are paint products, anticorrosion coatings, fireproofing coatings and other materials for use with residential, institutional and commercial buildings. They include both interior and exterior paints. Approximately 90 percent of all architectural coatings are now water-based, with the remainder solvent-based. Water-based paints are found by most professional painters and do-it-yourself users to be easier to apply and clean up.

Industrial coatings account for 40 percent of the market and are used by the aerospace, automotive, consumer products, original equipment manufacturing, shipbuilding, and infrastructure supplies industries. These coatings can reduce friction or serve as adhesives. They can resist temperature extremes, prevent corrosion and guard against microbial contamination. Reflective paints and coatings are needed for reflective markers and signs on roadways and airport runways. Fabric and wood coatings beautify products and help items to resist wear and stains.

Speciality products include automotive refinishing and industrial maintenance materials that help keep machinery in working condition. Marine paints prevent rust and barnacles on ships and docks. Traffic marking paints are used for roadway lane markers, parking lot striping paint, and airport surfaces. Graffiti-resistant paints help reduce the cost of cleaning urban buildings and infrastructure.

Addressing environmental issues proactively

Along with protecting structures and objects, the industry is also focused on protecting the environment. This includes developing sustainable and non-polluting manufacturing processes as well as products that limit emissions of volatile organic compounds (VOCs) and hazardous air pollutants (HAPs).

VOC emissions in the US from architectural coatings have drastically decreased over the last few decades, even while the use of architectural coatings has increased over the same time period nationwide. The Toxic Release Inventory (TRI) by the US Environmental Protection Agency (EPA) indicates that releases by the paints and coatings sector decreased by 81 percent between 1990 and 2014.

More than 90 percent of architectural coatings sales in the US are now for environmentally preferable water-based paint. In Europe, the auto coatings sector is supporting the emergence of water-based technologies, led by the efforts of auto manufacturers in response to environmental issues.

Other benefits from recent innovations include energy efficiency. Traditionally, 70 percent of the energy consumed in automotive OEM assembly plants is traditionally attributed to painting operations. A new process lowers cost, emissions and complexity by allowing the wet-on-wet application of a primer, base coat and clear coat, without any heated flash-off zones in between. Paints designed for the aerospace industry help reduce aircraft weight and improve fuel economy.

Steady growth led by Asia

According to analysts at MarketsandMarkets, the paints and coatings market is projected to grow from $160.54 billion in 2017 to $209.36 billion by 2022, at a CAGR of 5.45 percent.

Currently, Asia accounts for 52 percent of the volume and 45 percent of the value of the global coatings market. Asia is also the fastest growing market. Rising population levels, more middle class consumers, massive infrastructure developments and widespread urbanization in the region have increased demand for paints and coatings for buildings, public infrastructures, individualized living spaces, automobiles, and a growing number and variety of consumer products. In 2017, the Asian coatings industry was estimated to have grown by 5.7 percent in volume and 6.3 percent in value. Not surprisingly,the largest coatings market in Asia is China, with 56 percent of the market and a value of $53.3 billion. The next largest Asian markets are India and Japan.

Market growth in the US, Western Europe, and Japan will remain steady but at a slower pace, corresponding to the overall health of the regional economy. Overall demand from 2016 to 2021 is expected to increase at an average annual rate of 3 percent in the US and 2 percent in Western Europe.

Paint-on solar panels and more

Recently, a team of Australian researchers announced a paint that can be used to generate clean energy. The material absorbs solar energy as well as moisture from the surrounding air. It can then split the water into hydrogen and oxygen, collecting the hydrogen for use in fuel cells or to power a vehicle. Manufacturers are using specialized coatings to smooth the surfaces of 3D-printed parts.

With most 3D printers, the printed parts typically do not have a high-gloss appearance, so the parts often need to be sanded or polished. However, this approach requires access to specialized equipment and adds both processing time and cost. The application of a coating via spraying, brushing, or dipping is easy and relatively inexpensive, does not require specialized equipment, and provides the potential to not only smooth the surface but also impart added functionality to 3D-printed parts.

“Nanopaint’ is another exciting area of development. Metal nanoparticles are being used in the electronics industry to coat the surfaces of capacitors. And a coating made from nano titanium dioxide can make glass change colour when exposed to light or help ensure that dirt does not accumulate on glass windows but simply washes away with the rain.

Drivers and challenges for consolidation

Dow and DuPont, Bayer and Monsanto; and ChemChina and Syngenta-these and other recent mega-deals reflect the ongoing trend of consolidation across the chemical industry.

For paints and coatings, consolidation has become a long-term trend, especially in Western markets with limited organic growth. In North America, for example, the industry has been consolidating for decades. In certain end market segments, fewer than ten players (and in some cases, five or less) control over 90 percent of the market. In most other North American markets, fewer than ten companies maintain at least 75 percent of value. Worldwide, however, the markets are still very fragmented overall. According to 2016 data gathered by PPG, the global industry is led by ten companies, but approximately 50 percent of the global market is controlled by smaller companies, many of them at the regional or local level.

Trends in paints and coatings M&A (2013-2017)

PE deals in paints and coatings (2013–2017)

In 2017, the biggest deal for paints and coatings was the Sherwin-Williams/Valspar merger. Sherwin-Williams has a prominent market position in architectural paint in

North America, South America, China, Australia and the UK. In industrial coatings, the combined company will be a global market leader in packaging coatings, coil coatings, general industrial coatings and industrial wood coatings.

The other major transaction for 2017 involved Japan-based Nippon Paint Holdings Co Ltd, the fourth largest paint company worldwide, which acquired Dunn-Edwards Corp for $600 million. To date, Nippon has focused on automotive coatings in the US. This deal now establishes its architectural paints business in the region.

Successful consolidations can help paints and coatings companies to seize growth opportunities, enter new markets, improve capabilities, increase efficiencies through scale or improved processes, diversify their products, and rationalize their asset portfolios.

In many cases, companies can find themselves squeezed between highly consolidated suppliers and customers. Consolidation then becomes almost an inevitable step beyond a certain point in the business cycle.

However, challenges remain for paints and coating company considering a consolidation. As with any industry, a seller’s market can turn into a buyer’s market before the deal is done. Anti-trust regulations often come into play, especially for larger deals or sectors that are already highly consolidated. To win anti-trust approval by the US Federal Trade Commission for the Sherwin-Williams/ Valspar merger, Valspar had to sell its North America Industrial Wood Coatings Business because just three companies dominated its wood stains and sealants market.

PPG’s attempt to acquire AkzoNobel reflects other challenges, showing that potential deals are sometimes challenged by disagreements related to corporate culture, employee sentiments, national viewpoints, and other concerns that go well beyond the bottom line. In arguing against a PPG takeover, AkzoNobel stated that some employees were opposed to the deal and that the two companies’ cultures did not mesh. With concerns over the impact on Dutch jobs, a government minister added that the acquisition was “not in the national interest.”

Conclusion

New regulations, price fluctuations for raw materials and geopolitical uncertainty will continue to affect deal activity in the paints and coatings industry. A general increase in global GDP for 2018, perhaps around 3.9 percent, may increase the potential for organic growth by businesses as opposed to growth by consolidation. However, consolidations will remain a favoured strategy by suppliers, manufacturers and customers across the industry.

In many ways, it all comes down to the benefits of scale, including brand equity, purchasing leverage, pricing power, and production efficiencies. The desire for scale has driven significant consolidation among paints and coatings manufacturers for the last 30 years, and M&A will likely remain a key priority for global paints and coatings companies.

Author: Vir Lakshman is Head of Chemicals and Pharmaceuticals, KPMG in Germany.

© Chemical Today Magazine


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