PPG bid AkzoNobel highlights chemical merger: Fitch

PPG bid to AkzoNobel highlights chemical merger: Fitch

11:36 AM, 14th March 2017
AkzoNobel headquarters building
AkzoNobel headquarters building in Amsterdam, Netherlands. (File photo)

LONDON, UK/ CHICAGO/ NEW YORK, US: Consolidation continues to dominate the global chemicals industry as low product prices, weakened currencies, slow growth in both industrial economies and emerging markets and excess capacity in certain chemicals pressure firms to consider merging, according to Fitch Ratings. 

In particular, consolidation in the coatings industry is being driven by companies in mature markets looking to expand into emerging markets and slow growth prospects in an overall fragmented industry. Last week's proposed merger announcement between PPG Industries Inc and AkzoNobel NV and Sherwin-Williams pending $11 billion acquisition of Valspar Corporation serve as good examples.

AkzoNobel announced it had received an unsolicited, non-binding and conditional proposal from PPG at €83 a share and at roughly a 29 percent premium to AkzoNobel's share price. The offer was rejected by AkzoNobel, which cited significant undervaluation. However, PPG continues to remain interested and may go back with a higher offer. 

A PPG AkzoNobel combination would fuse the world's top two paintings and coatings manufacturers, creating a company with around 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, wherein both companies currently hold the top 3 global positions. 

Though, we believe both companies lack significant financial headroom under credit metrics for a merger of this size. In addition, significant US and EU regulatory clearance required to complete the transaction would be challenging. 

AkzoNobel likely in response to the PPG bid is now seeking to separate its non-core speciality chemicals business from its paints and coatings business, which was around 34 percent of YE 2016 sales but 45 percent of 2016 YE EBITDA. This business is not as complementary with PPG's current structure, and Fitch expects a divestment or separate listing to be done to return 100 percent value to shareholders; this may have negative implications for AkzoNobel credit metrics and, therefore, it's rating. 

AkzoNobel has been successfully restructuring its business and improving its EBITDA margin following previous years' challenges due to a weak housing and construction sector in Europe. Repayment of debt and minor M&A activity have also helped restore credit metrics within guidelines. Though, growth is limited in the fiercely competitive market, making cost-cutting and streamlining of processes an opportunity to return value to shareholders. 

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