Mergers & acquisitions in the coatings industry.
The rebound in the economy has enabled companies that suffered during the recent downturn to restructure and reorganize and divest themselves of non-core businesses. Those organizations that weathered the difficult times well have bolstered their operations with smaller, strategic bolt-on acquisitions. Private equity firms have acquired larger downstream businesses that have been on the selling block. In the coatings industry, 3-5% of firms are typically involved in M & A activity, according to Stephen Einhorn, president of Einhorn Associates, a mergers and acquisitions firm specializing in coatings. "Activity has been pretty steady over the last year or so and should continue to be so in 2005," he says.
In 2004, increasing raw material prices have been a major issue for paint and coatings companies. The profitability of many firms has been impacted as these companies have struggled unsuccessfully to pass on price increases to their customers, according to Mr. Einhorn. "A number of paint manufacturers have not been able to raise prices despite the dramatic increases in raw material and energy costs. As a result, their margins are being squeezed. Profitability has also declined for some of those companies that have managed to increase sales. Knowledgeable buyers in the industry understand that this situation is probably temporary because formulated chemical manufacturers, including paint and coatings companies, have been remarkably consistent in regaining their margins for the long run," he explains. Mr. Einhorn expects that in 2005 pricing will still remain an issue, despite the fact that the cost pressures associated with high oil prices should be subsiding by then.
According to Mr. Einhorn, strategic, long-term buyers are more interested in the sales growth of a target company, while short-term financial buyers tend to focus on earnings and profitability. Strategic buyers tend to be other chemical or coatings firms looking to enhance their core businesses. The more successful private equity firms (financial buyers) tend to require more due diligence and seek more unique technologies and market niches. Specialty chemicals are more knowledge- and technology-intensive. "Buyers familiar with the particular market sector will be interested in making acquisitions of this type," says Michael D. Brown of The ChemQuest Group, Inc., a management consulting firm located in Cincinnati, OH. Private equity (PE) firms, on the other hand, invest with short-term gain in mind and are interested in more upstream commodity players. "These companies are often capital intensive with simpler chemistry, and PE firms can improve the cost structure in order to get a return on their investment in a much shorter period of time," notes Todd Muhleman, financial analyst with The ChemQuest Group.
Much of the recent M & A activity has taken place in Europe. Deutsche Bank reported in December 2003 ("Chemical/Specialty M & A Still Price Sensitive") that there is a valuations gap between European and U.S. specialty companies, with U.S. companies having much higher valuations than their European counterparts. Private equity firms have found European companies to have attractive valuations, while U.S. companies have been left to strategic buyers looking to bolster their market positions with smaller, bolt-on acquisitions.
According to the report, "Private Equity in Chemicals," that was commissioned by the Chemical Industry Association (CIA) and prepared by Cogency Chemical Consultants Ltd., in January 2004, private equity investors are increasing their participation in M & A activity in the chemical industry. PE investors could account for as much as 30% of global transacted value, and an even higher amount (up to 40%) in Europe. The chemical industry is viewed as being more complex than other sectors in which private equity firms participate. However, there is continued interest placed by private equity firms in the chemical industry. This interest is attributed to the fact that the cyclicality and volatility of chemicals markets lead corporate managements to "undertake regular reassessment and rebuilding of the business model, leading to fragmentation, repositioning, and consolidation of industry segments."
The CIA study also found that equity firms believe that their increasing participation in the chemical industry will "drive a more entrepreneurial culture, create sustainable value for investors, improve cash management, financial discipline and management quality, and impose better corporate governance." Mr. Brown notes that PE firms can also have a positive impact on companies they do not acquire. "The threat of a takeover can bring fiscal discipline to companies as well," he says.
Five value creation strategies were identified in the CIA report: organic growth, market consolidation, buy and build, focus and simplify, and operating cost leadership. PE firms generally hold on to an acquisition for one to three years and then sell it for a profit, according to Mr. Muhleman. "In this short time frame, the majority of value is created through improving cost structure. There isn't enough time to invest and deliver on new product development and introduction," he states.
PE firms generally exit the business by selling off to strategic buyers. Stock market conditions have not been favorable for initial public offerings. Secondary buyouts, according to the CIA report, are increasing though, as financial pressures on trade buyers have increased. Some large acquisitions must be broken apart and sold off in pieces in order to meet debt repayment schedules and ensure that the remaining businesses continue to improve in value. "Economic conditions, the financial health of trade buyers, stock market sentiment, and the quality of businesses for sale all influence the mix of options available to PE houses at any given time," according to the report.
It is also important to note that not all M & A activity results in industry consolidation. "M & A is not equivalent to consolidation," stresses Mr. Muhleman. "When evaluating the level of consolidation in a market sector, the type of transactions must be carefully considered," he adds. Sometimes companies swap business units, which does not reduce the number of players in the market. Private equity firms sometimes acquire subsidiaries, turn them around, and then sell them off to a strategic buyer, which also does not result in consolidation. Additionally, if a PE firm breaks a company into smaller business units, the opposite of consolidation occurs--with the number of players actually increasing.
The ultimate question, of course, is what impact the recent M & A activity in the chemical industry--both upstream and downstream--will have on the coatings sector. "The coatings industry is the number one consumer of specialty chemicals," says Mr. Brown. "Consolidation in the specialty chemicals industry will therefore have significant impact on the coatings sector over the next several years." Raw material suppliers may gain pricing leverage, which will place additional cost pressures on more downstream players in the coatings market such as resin, pigment, and additive manufacturers, as well as paint formulators themselves.
There has been a significant level of upstream activity, with a few prominent private equity firms making major investments in the chemicals industry. Blackstone's purchase of Celanese; Apollo Management's acquisitions of Shell's resins business, some of the Eastman CASPI (resins) business, and most recently Borden Chemicals; and KKR's Rockwood Specialties purchase of many of the Dynamit Nobel operations and Johnson Matthey's pigments business are just a few.
Apollo Management significantly increased its position in resins for coatings when it acquired Eastman's acrylate ester monomers, composites (unsaturated polyester resins), inks and graphic arts raw materials, liquid resins, powder resins, and textile chemicals businesses. Observers are waiting to see whether or not Apollo will combine this new company with its Resolution Performance Products business (previously the resins business of Shell Chemicals). According to Michael Gregus, director of The ChemQuest Group, a combined entity would have annual sales of about $1.6 billion and be well positioned in most resin technologies. "The question would then be whether or not any strategic buyer would be in a position to afford such a large acquisition," notes Mr. Brown.
Some recent strategic maneuvering by companies has also been important to the paint and coatings industry. "Several dynamics are at work in the coatings industry, many of which are leading to the recent flurry of merger and acquisition activity," says Jim Stephanadis, global business
director, Resins & Polymers, Noveon Performance Coatings. "For example, producers of paints and coatings are consolidating to capture market share, access complementary or new technology, improve channels-to-market, and grow in new geographic regions." One result is that companies are becoming larger and more globally focused, enabling them to demand more of their suppliers to hold costs steady or even reduce them. Mr. Stephanadis adds that, at the same time, companies are also rationalizing technical staff and are demanding more services from their suppliers. "As a result of both these trends, suppliers to the coatings industry have reduced capital available to reinvest in their businesses. Thus, they often have to make difficult choices and establish priorities in terms of resource allocation, technology leveraging, new product developments, and/or investing in new capacity or even performing needed maintenance."
Lubrizol has also been a key strategic buyer in the resins and additives segments. The company expanded its fledging coating additives business with its 1993 acquisition of George M. Langer & Co. establishing a European base of operations for technologies for paint, coatings, and inks. In 1998, three acquisitions followed: the Latin American coating additives business of BetzDearborn Brasil Ltda.; Carroll Scientific, Inc.; and selected assets of Sumitomo Polymers North America in Pennsylvania. Within the last two years it has significantly expanded its position with the acquisitions of Dock Resins, Avecia's coatings and inks additives hyperdispersant business, and Noveon Inc.
"When Lubrizol management decided it wanted to diversify the company, they started investigating how to transfer existing technology into different industries and end-use markets. The company realized, however, that they could not rely on organic growth alone; they needed to partially acquire their way to success," says Mr. Stephanadis. He adds that the companies or portions of business that Lubrizol has purchased over the better part of 10 years have allowed it to expand geographically, add new product platforms to its portfolio, build on its technical expertise, and build its core competencies. "This M & A activity, coupled with our innovative organic technological developments, makes The Lubrizol Corporation--and especially its Noveon division--a leading supplier of additives and specialty resins for the coatings industry," he continues.
Consolidation of upstream paint and coatings players is expected to make the industry more profitable and, in general, healthier. Whether or not recent M & A activity has resulted in increasing pricing power for coatings players is hard to tell. "The energy issues facing all of the chemical industry have overshadowed any impact that recent mergers and acquisitions might be having at this point in time," explains Mr. Brown. "I do believe, though, that in the long term we will see some positive impact on pricing power," he continues.
The two largest transactions for coatings formulators in the last couple of years are Bain Capital's acquisition of SigmaKalon from TotalFinaElf and Berkshire Hathaway's purchase of Benjamin Moore. The Berkshire Hathaway acquisition is an exception to the general behavior of private investment groups. "Benjamin Moore is one of the top coatings businesses in the world in terms of management and profitability," says Mr. Brown. "The value in Benjamin Moore is not the technology, but the excellent brand name and extremely loyal distribution channel," he continues. "Warren Buffett is known for finding value where others don't, and this acquisition is a perfect example."
Most M & A activity within the coatings industry has been on a much smaller scale, with national players acquiring smaller regionals. The latest announcements concern the acquisition of two U.S. regional players: Professional Paint (PPI) by Mexican national Comex and Duron by Sherwin-Williams. "We can only speculate about the intentions of Comex, but it makes sense that they are looking to enter the U.S. market at a low cost position," says Mr. Brown. "It is also curious to consider why Sherwin-Williams didn't snap up PPI, since the company has indicated that it remains interested in further regional acquisitions," he adds. Without having any details on how the deal took place, it is difficult to say whether or not Sherwin Williams had any opportunity to be a player. In any event, with the backing of Comex, PPI will be a formidable competitor for Sherwin-Williams in the Western and Intermountain regions of the U.S.
The Duron acquisition increases Sherwin-Williams' market share to 38% and gives the company close to 3000 stores, which is nearly double that of competitor Home Depot. It also enhances the company's position in the contractor market in the eastern U.S. Sherwin-Williams also recently completed its acquisition of Paint Sundry Brands of Philadelphia.
One area that has not experienced any noticeable consolidation but that needs to see significant restructuring is the powder coatings market. "Overcapacity has been an issue for this sector for some time, and we would expect to see a lot of consolidation," says Mr. Brown. However, the players in this market are not seen as being profitable enough to be attractive as takeover targets. "Most likely a private equity firm will identify a potential for improving value and take the lead in starting acquisition activity," adds Mr. Muhleman. "In this particular sector, there are a number of family-owned businesses that do not appear profitable enough to warrant maintaining them, but they do provide enough income to support the livelihoods of their owners. It will take some time for these businesses to either fold or be acquired by larger players," he also notes.
As we move closer to 2005, the level of M & A activity remains relatively high. Will it continue through next year? "The chemical industry tends to be the leading indicator for economic expansion in general," says Mr. Brown. "It tends to come up before the rest of economy, and some analysts believe we are near the peak of this cycle," he continues. "Therefore we may expect to see a decline in acquisition activity by private equity firms and an increase on the selling side, as long as strategic buyers remain financially capable of bolstering their positions through purchase of these businesses."
2003-2004 Mergers & Acquisitions Activity Year Acquirer Country Commodities Jan 2004 Koch Industries USA Apr 2004 Blackstone (private equity) USA 2004 Chemial (owned by private equity 3i) UK Specialties Jan 2003 UCB NET Jul 2003 Huntsman USA Aug 2003 Halox (div. of Hammond Group) USA Nov 2003 Texas Pacific Group USA Dec 2003 Sherwin-Williams USA Jan 2004 Lubrizol USA Feb 2004 JM Huber USA Mar 2004 International Specialty Products USA Mar 2004 Arch Chemicals USA Apr 2004 Azelis LUX Apr 2004 Elementis UK Apr 2004 Kohlberg, Kravis, Roberts USA Apr 2004 Lubrizol USA Jul 2004 Apollo Management USA Jul 2004 Apollo Management USA Jul 2004 DSM Coating Resins NET Aug 2004 Rockwood Pigments (KKR) USA Formulators Jan 2003 Chemcraft International CAN Jan 2003 ICI Paints' North American Division USA Feb 2003 Bain Capital USA Mar 2003 Magni Group USA Mar 2003 Spencer Coatings UK Apr 2003 Akzo Nobel NET Apr 2003 General Paint CAN Apr 2003 RPM USA May 2003 Altana GER May 2003 Lafarge Peintures (Materis group) FRA Jun 2003 Sto AG GER Sep 2003 Akzo Nobel NET Sep 2003 Hillebrand Coating Technologies GER Sep 2003 ITW-Devcon USA Aug 2003 Riverside Investment Fund USA Jan 2004 Chemcraft International USA Jan 2004 Professional Paint (PPI) USA Jan 2004 Valspar USA Mar 2004 H.B. Fuller USA Mar 2004 Sika SWI Apr 2004 CWS Powder Coatings GER Apr 2004 Fenzi Group ITA Apr 2004 Lafarge Pintures FRA May 2004 Sherwin-Williams USA Jun 2004 Cloverdale CAN Jun 2004 FLH group SWI Jul 2004 Akzo Nobel NET Aug 2004 Comex MEX Aug 2004 Valspar USA Aug 2004 Salchi ITA Year Acquiree Country Value Commodities Jan 2004 Dupont's Invista textiles and intermediates USA $4.4 BN Apr 2004 Celanese GER $3.7 BN 2004 AP Chemicals from Clariant UK Specialties Jan 2003 Air Products' graphic arts business USA Jul 2003 Vantico/Matlin-Patterson Global Aug 2003 Irgacor organic corrosion inhibitor business from Ciba SWI Nov 2003 Kraton Polymers from Ripplewood Global Dec 2003 Accurate Dispersions from Eastman USA Jan 2004 Avecia's additives business UK Feb 2004 CP Kelco ApS from Hercules USA Mar 2004 Biochema Schwaben GER Mar 2004 Avecia's biocides business UK $215 MM Apr 2004 Sibeco BEL Apr 2004 Sasol Servo NET [euro]48.5 MM Apr 2004 Dynamit Nobel GER [euro]2.5 BN Apr 2004 Noveon USA $1.84 BN Jul 2004 Eastman's CASPI unit USA $215 MM Jul 2004 Borden Chemical from KKR USA $1.2 BN Jul 2004 Huttenes-Albertus Lackrohsoffe coatings-resins busin GER Aug 2004 Johnson Matthey's pigments and dispersions business USA $50 MM Formulators Jan 2003 Antoni Coatings CAN Jan 2003 Hancock architectural paint stores USA Feb 2003 SigmaKalon from TotalFinaElf FRA $1 BN Mar 2003 Lackfabrik Dr Schmid Nachf GmbH GER Mar 2003 Pearl Paints UK Apr 2003 Omni AB's bus painting facilities in Sweden SWE Apr 2003 Ideal Paints CAN Apr 2003 Koch Waterproofing Solutions USA May 2003 Schenectady's global electro- insulation business USA May 2003 Alp Pinturas SPA Jun 2003 Siocof AG FRA Sep 2003 Techni-Coat International NV BEL Sep 2003 Tirbo Tech AG SWI Sep 2003 Futura Coatings USA Aug 2003 HOB Prima of Brasy CZE Jan 2004 Paramount Paint & Lacquer from Surface Protection Industries USA Jan 2004 Classic Paint USA Jan 2004 De Beer Lakfabrieken BV NET Mar 2004 Probos SA's adhesives and resins business POR Mar 2004 Akzo Nobel's polyurethane adhesives NET Apr 2004 Dorken's powder coating business GER Apr 2004 Akzo Nobel's mirror coatings BEL Apr 2004 R M Distribution FRA May 2004 Duron USA $253 MM Jun 2004 Rodda Paint USA Jun 2004 Franken Coatings GER Jul 2004 Altana Group's coil coatings business (Rhenacoat) FRA Aug 2004 Professional Paint (PPI) USA Aug 2004 Associated Chemists (forestry products line and assests) USA Aug 2004 Altana Group's coil coatings j.v. business ITA [euro]27 MM (Salchi Rhenacoat) Year Sales Commodities Jan 2004 Includes sizeable coatings supplies business: amines for polyamide powder coatings; waterborne PU systems and epoxy coatings; anti-fouling additives for marine coatings; curing agents and other additives. Apr 2004 2004 [pounds sterling]15 MM Clariant's esters business. Specialties Jan 2003 $17 MM Liquid resins, including waterborne emulsion and solid acrylics for graphic arts. Includes production facility in Langley, South Carolina with 35 employees. Jul 2003 Restructure that gives Hunstman full operational control of the business. Renamed Huntsman Advanced Materials. Aug 2003 Includes coating patents, manufacturing technology, and R & D. Nov 2003 $770 MM Private equity exit from Kraton which was bought from Shell 2001. Dec 2003 $45 MM Colorants product lines and equipment. Includes 140 employees. Jan 2004 $50 MM Includes pigment dispersants such as Solsperse, Solplus and Solthix for coatings and inks. Feb 2004 Leading producer of xanthan gum, pectin, and carrageenan. Rheology modifiers. Mar 2004 Biocides. Mar 2004 Apr 2004 [euro]28 MM Distribution of additives, flame retardants, and general chemicals. Apr 2004 [euro]108 MM Additives for coatings and specialty surfactants, and paper chemicals. Apr 2004 $1.6 BN Includes Chemetall and Sachtleben to be combined with KKR's Rockwood pigments. Apr 2004 $1.2 BN Jul 2004 $600 MM CASPI (coatings, adhesives, specialty polymers, and inks). Majority of these businesses were acquired during Eastman's $500 million purchase of Lawter International in 1999, and its $355 million acquisition of McWhorter in 2000. Jul 2004 $1.4 BN Jul 2004 [euro]15 MM Resins. Aug 2004 Formulators Jan 2003 Wood coatings. Jan 2003 Paint stores in Boston area, from Sico subsidiary Hancock. Feb 2003 [euro]1.7BN Does not include the U.S. business (Sigma Coatings) which is involved in litigation with a customer (sales of [euro]35MM). Mar 2003 Schmid paint company employs 20 people and concentrates on industrial paints and exports. Products widely used in auto industry. Mar 2003 Apr 2003 Apr 2003 General Paint is a subsidiary of Professional Paints of the U.S. General had 69 locations in western Canada. Ideal is an architectural paint firm in Ontario. Apr 2003 $30 MM Operate as a stand-alone business under RPM's Tremco unit. Provider of waterproofing solutions to new residential construction market. May 2003 $90 MM Wire coatings and insulation of wires and impregnation resins for the insulation of wires and impregnation resins. May 2003 [euro]23 MM Spanish decorative paint maker. Jun 2003 [euro]15 MM Facade paints and elastic coatings. Sep 2003 [euro]10 MM Plastic coatings for consumer electronics, cosmetic packaging, sports and leisure goods. Sep 2003 Low-friction coatings for dry film lubrication, corrosion protection. Also functional coatings with noise reduction and heat conduction properties into auto and machine industries. Sep 2003 Polyurethane and polyurea coatings, elastomers and structural resins and other specialty coatings. Aug 2003 35,000 tons of decorative paint capacity. Jan 2004 Wood finish paints and lacquers based in Los Angeles serving southern California and Mexico. Jan 2004 Non-mfg assets and four retail stores: Professional Paint owns a number of regional paint companies; Hanly Paint, Parker Paint, Kwal Paint, Sophie Morris Paint, Stellar Kwal Paint (formally Jones-Blair), Duckback Products, General Paint, Ideal Paint. Jan 2004 [euro]39 MM Manufacturer and distributor of automotive refinish coatings. Mar 2004 $30 MM Water-based, hot-melt, reactive adhesives for assembly, woodworking, footwear and converting. Emulsions for coatings as well. Mar 2004 [euro]17 MM Leading position in the sandwich panel bonding systems for truck trailors, building facades, and wind turbine blades. Apr 2004 Apr 2004 [euro]7 MM Akzo is looking to divest other general industrial coatings. Apr 2004 $18 MM French decorative paint company. Larfarge Pintures is part of building materials group Materis. May 2004 $350 MM Regional paint firm with 253 company stores. Jun 2004 Merger of two western regional paint companies. Jun 2004 Industial Paint. Jul 2004 [euro]11.6 MM Includes coil coatings facility at Montataire. Aug 2004 Western U.S. regional paint company. Aug 2004 Sealants, surface primers, paints $28 MM and stains, inks, and specialty chemicals for makers of oriented strand board and other wood products. Aug 2004 Selling the 51% stake in joint venture to its partner. Data supplied by ChemQuest.
by Cynthia Challener
JCT COATINGSTECH, Contributing Writer
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|Title Annotation:||Market Update|
|Date:||Nov 1, 2004|
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