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Mergers & acquisitions in the coatings industry.

The furious pace of merger and acquisition (M & A) activity in the chemical industry over the past two years has extended throughout all sectors including paints and coatings. Both private equity firms and strategic players have made acquisitions along the value chain from upstream commodity raw material suppliers to downstream formulators and paint manufacturers. Whether or not the activity will result in overall consolidation and improved pricing positions in the coatings industry is yet to be determined.

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
COPYRIGHT 2004 Federation of Societies for Coatings Technology
No portion of this article can be reproduced without the express written permission from the copyright holder.
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Title Annotation:Market Update
Author:Challener, Cynthia
Publication:JCT CoatingsTech
Date:Nov 1, 2004
Words:3748
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