Akzo Should Seize Victory from Defeat in Axalta Debacle

(Bloomberg Gadfly) -- Akzo Nobel NV boss Thierry Vanlancker has the chance of a second stab at a jumbo chemicals deal with U.S peer Axalta Coating Systems Ltd. He should grab it.

Axalta's negotiating position has been weakened after it started talks with Japan's Nippon Paint Holdings Co. Ltd. last month, having already entered into discussions with Akzo about a possible all-share merger. Maybe the U.S. company hoped to get an auction going. The snag is that Akzo withdrew, and a firm agreement with Nippon failed to materialize.

It would have been wiser for Axalta to get Akzo on the hook first before trying to extract something better from Nippon. Maybe Nippon will come back. For now, though, the Dutch company can play hardball.

The potential synergies of a combination are sizable.  Analysts reckon these could be at least 250 million euros ($298 million) annually. Suppose Akzo can eke out something a bit better, say 300 million euros. Taxed and discounted for the time and cost taken to achieve these financial benefits, they could be worth almost 2 billion euros in today's money.

There remain two obstacles to a deal for Akzo. The first is relative valuation: Axalta shares trade at a steep premium to Akzo's, so a nil-premium stock deal would see the Dutch group's shareholders owning a smaller share of the pie than their profit contribution merited.

That wrinkle weakens the economics of combining -- but doesn't preclude a viable transaction. Akzo's market value is 19 billion euros. By the time any deal with Axalta completed, it would have sold or de-merged its specialty chemicals division, worth an estimated 10 billion euros, and paid out a 1 billion euros special dividend. "New" Akzo is then worth 8 billion euros.

Axalta is worth $7.7 billion (6.5 billion euros). Crunch the pair together at these values and Akzo shareholders get 55 percent of the business. The operating income contribution is more like 70 percent over the last reported four quarters, according to Bloomberg data. Akzo has, according to Reuters, sought 63 percent ownership for its shareholders -- equivalent to paying no premium at all. Its investors might still feel that's less than the stake they deserve, with 1 billion euros of theoretical value transferred to Axalta shareholders. But Akzo's nearly two-thirds share of those mouthwatering synergies would pay for that.

The second obstacle is trust. The recent shenanigans may make it hard to pursue talks in good faith. That in turn may make it more difficult to agree a role in the combined group for Axalta CEO Charlie Shaver. But this shouldn't be a dealbreaker.

It won't be easy for Vanlancker to strike a deal that leaves his shareholders in the money. But there's a path to a transaction and he owes it to his investors to have another go.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

To contact the author of this story: Chris Hughes in London at chughes89@bloomberg.net.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net.

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