Thwarted PPG Seen Amping Up Deal Hunt Amid Industry M&A Rush

(Bloomberg) -- PPG Industries Inc.'s failure to win rival Akzo Nobel NV with a $29.5 billion offer means the U.S. paint giant will renew its hunt for acquisitions as industry dealmaking heats up.

Potential targets include closely held Kelly-Moore Paint Co. and Brazil's Suvinil, a division of BASF SE, according to UBS Group AG. Another possibility: Akzo Nobel itself, which is set to become an even more appealing prize with a plan to split off its specialty chemicals unit. Under Dutch law, PPG can bid again in six months.

“PPG continues to covet Akzo,” said Kevin McCarthy, an analyst at Vertical Research Partners. “One could argue that separating chemicals makes Akzo more attractive to PPG.”

Walking away from the Akzo Nobel bid -- at least for now -- leaves PPG without a merger partner as paintmakers bulk up with billions of dollars in deals. The move came on the same day that Sherwin-Williams Co. closed its $9.3 billion acquisition of Valspar Co. to nose ahead of PPG as the world's biggest maker of paints and coatings.

PPG advanced 2.6 percent to $109.16 at the close Thursday in New York, the biggest advance in almost three months. The shares have climbed 15 percent this year, doubling the gain of the S&P 500 materials index.

“Our overall acquisition pipeline remains solid, and we continue to have the option to repurchase PPG stock,” the company said in an emailed statement. BASF declined to comment. Kelly-Moore didn't respond to a request for comment.

Deal Options

Michael McGarry, PPG's chief executive officer, could easily reclaim the crown as the biggest coatings maker with a modest deal or two. He previously said the Pittsburgh-based company, with brands such as Glidden and Olympic, plans to spend as much as $3.5 billion on acquisitions and share repurchases through next year.

“They have a rich pipeline of M&A opportunities, irrespective of Akzo,” McCarthy said. “We would not rule out future coatings deals of any size for PPG.”

The fragmented coatings industry offers plenty of options, with more than 20 potential targets that would sell for at least $1 billion each, said John Roberts, a UBS analyst. The top three coatings companies control about a third of the global market, the next six have less than a quarter, and more than 7,500 firms comprise the rest, according to a Sherwin presentation.

Consolidation shows no sign of abating, said Ghansham Panjabi, an analyst at Robert W. Baird & Co. Larger companies can cut costs and also offer a broader product lineup to industrial customers such as automakers, he said. The chemical industry had a record $370 billion of deals pending last week as companies used low-cost financing to counter slumping volume growth and keep up with rivals' growing scale, according to Bloomberg Intelligence.

Panjabi praised PPG for walking away from Akzo Nobel, given the difficulty of completing a hostile takeover in The Netherlands along with perhaps two years waiting for antitrust clearances.

Akzo Resistance

Akzo Nobel resisted multiple takeover overtures by McGarry including ever-higher bids, personal visits to the Dutch capital, lengthy letters and several sweeteners added earlier this week. In the end, Akzo Nobel Chairman Antony Burgmans refused even a five-minute phone call with McGarry.

Burgmans also overcame an attempt by Elliott Management Corp. to remove him in order to jump-start talks with PPG. The hedge fund controlled by billionaire Paul Singer had pressured Akzo Nobel to negotiate a deal. After months of intransigence, Elliott asked a court to allow shareholders a vote on the removal of Burgmans. It lost the case earlier this week.

Akzo Nobel said on Friday that it would “actively solicit” input from shareholders, including those who challenged the company. CEO Ton Buechner in a statement expressed regret that some shareholders believe the company didn't sufficiently explain its considerations regarding PPG's proposals.

Further Focus

Akzo Nobel's plan to separate the specialty chemicals unit will sharpen its reliance on coatings and mirror an earlier shift by PPG. That will potentially turn the Amsterdam-based company into a cheaper, more focused target. If it continues to face shareholder pressure over the PPG deal and has “hiccups” executing its stand-alone plan, the Dutch company could have a change of heart and even welcome a renewed PPG bid, Panjabi said. 

PPG is known as a disciplined dealmaker, UBS's Robert said. The company dropped out of initial bidding for Comex SA, Mexico's largest paintmaker, before swooping in to buy the company in 2014 for about $2.3 billion. Even after walking away from Akzo this week, a future deal can't be ruled out.

“It's not the end of the Akzo story,” Roberts said. “PPG could come back in six months.”

To contact the reporter on this story: Jack Kaskey in Houston at jkaskey@bloomberg.net.

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Bruce Rule