October 30, 2017 / 6:25 PM / 2 years ago

Breakingviews - Axalta deal complicates Akzo's juggling act

Thierry Vanlancker, CEO of AkzoNobel holds a can of Dulux paint at the opening of the company's new paint factory in Ashington, Britain September 12, 2017. REUTERS/Phil Noble

LONDON (Reuters Breakingviews) - Akzo Nobel has added another ball to an already tricky juggling act. Fresh from deflecting a takeover from one U.S. rival, the Dutch group confirmed on Monday that it is considering merging its paint unit with another, former DuPont subsidiary Axalta. A combination makes sense. But new Chief Executive Thierry Vanlancker is busy grappling with weak results and a chemicals spinoff.

The 20 billion euro Dulux owner has already resisted a 25 billion euro bid from paintmaker PPG and grappled with activist investor Elliott Advisors this year. As part of its defence, it pledged to spin off or sell its specialty chemicals division and boost margins at its coatings businesses. Its CEO and finance chief stepped down. Since taking charge in July, Vanlancker has twice lowered the company’s guidance for 2017 earnings. This is hardly an encouraging backdrop.

There is some logic to combining the world’s third- and fourth-largest paintmakers. Bernstein analysts reckon Akzo and Axalta could cut costs by 250 million euros, equivalent to 2 percent of their combined paint revenue, though competition regulators may demand disposals. Taxed at Akzo’s 26 percent rate and capitalised, the synergies would be worth 1.9 billion euros ($2.2 billion). That helps explain the $1.2 billion jump in Axalta’s market value after Reuters reported the talks on Friday.

Even so, it’s hard to see how the deal can be a true “merger of equals”, as Akzo suggested in its statement. The Dutch group’s chemicals arm could fetch anywhere between 8 billion euros and 12 billion euros. Take the mid-point of this range, deduct it from Akzo’s enterprise value of 21.1 billion euros, and assume the group’s 1.7 billion euros of debt stays with the paint business. In that scenario, Akzo’s equity would still be worth some 35 percent more than Axalta’s inflated market value.

The worry for Akzo shareholders is that the Dutch company could be willing to hand most of the benefits of a deal to Axalta in an attempt to escape another bid from PPG, which will be free to renew its pursuit in December. Negotiating a big deal with a supposedly equal partner would also suck in resources. Even if the numbers stack up, the risk of Akzo dropping one or more balls is high.


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