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Is Sherwin-Williams Painting Itself into an Antitrust Corner?

March 21, 2016
One area of antitrust scrutiny will be North American house-paint sales to do-it-yourself customers like Home Depot and Lowe's.

Sherwin-Williams Co.’s $9.3 billion deal to buy rival paintmaker Valspar Corp. drew skepticism from investors over its chances for antitrust approval without significant divestitures.

Valspar shares topped out at $105 in trading Monday, reflecting a provision in the agreement that allows Sherwin-Williams to trim the per-share offer to that amount from $113 if regulators require the divestiture of assets that generate more than $650 million in revenue.

The assumption is “they wouldn’t have put those contingencies into the deal structure if there wasn’t a meaningful chance they might trigger them,” said John Roberts, an analyst at UBS Securities.

John Morikis, chief executive officer of Sherwin-Williams, is forging the company’s biggest deal ever less than three months after succeeding longtime CEO Christopher Connor. Sherwin-Williams, which gets 84% of sales in the U.S., gains a company that generates almost half of its revenue abroad while also adding coatings for coils and packaging. Valspar will help Sherwin-Williams expand in the Asia Pacific region and Europe, Morikis said in an interview.

“This accelerates the strategy we have long had in place,” Morikis said by telephone Sunday. “Valspar is a company we have long admired.”

Minimal Divestitures

Morikis said the company expects antitrust regulators will require minimal divestitures at most. Sherwin-Williams can terminate the agreement if more than $1.5 billion of divestitures are necessary for antitrust approval.

One area of antitrust scrutiny will be North American house-paint sales to do-it-yourself customers, which are primarily sold through big-box retailers such as Home Depot Inc. and Lowe’s Cos., Roberts said. Acquiring Valspar eliminates one of that market’s four primary suppliers, which also includes Sherwin-Williams, PPG Industries Inc. and Masco Corp., said the analyst. He recommends holding Sherwin-Williams shares and doesn’t rate Valspar.

While the companies have little overlap outside the U.S., the deal may boost Sherwin-Williams market share in North America paint to more than 50%, potentially drawing antitrust scrutiny, said Christopher Perrella, an analyst at Bloomberg Intelligence.

Don Carson, an analyst at Susquehanna Financial Group LLP, said the companies compete in the U.S. house-paint market through different channels. Valspar sells to consumers through the big-box retailers, while Sherwin-Williams focuses on selling to contractors through its company-owned stores.

Dutch Boy

Sherwin-Williams paint stores and brands such as Dutch Boy, Easy Living and MAB helped generate sales of $11.3 billion last year. The company will add $4.39 billion of Valspar revenue from brands such as Valspar Ultra and Duramax, 12% of which comes from China and 7% from Australia, according to data compiled by Bloomberg.

The deal “makes a ton of strategic sense,” said Dmitry Silversteyn, an analyst at Longbow Research who has buy recommendations on both companies. It boosts Sherwin-Williams’s sales to U.S. do-it-yourself paint customers, international markets and industrial coatings markets, three areas where the company is under-exposed, he said in an e-mail Sunday

The combination also will catapult Cleveland-based Sherwin-Williams from the world’s third-largest paint company to first, surpassing industry leader PPG Industries and Akzo Nobel NV, Morikis said. Minneapolis-based Valspar is ranked No. 4.

Sherwin-Williams dropped 5.3% to $273.29, falling the most since July, while Valspar surged 23 percent to $103.22 at the close in New York. Sherwin-Williams shares have more than tripled in the past five years, while Valspar’s stock has more than doubled.

Sherwin-Williams abandoned a bid in 2014 to acquire Comex, Mexico’s largest paint company, after Mexican regulators blocked the sale.

Including $2 billion in Valspar debt that Sherwin-Williams will assume, the transaction is valued at $11.3 billion, Sean Hennessy, chief financial officer of the acquiring company, said by telephone. The equity purchase will be financed with $8.3 billion of new debt and $1 billion of cash, he said. The company said it has committed bridge financing from Citigroup Inc.

Sherwin-Williams said it expects to wring $280 million of annual savings from the combination within two years, eventually rising to $320 million. The deal should close by the end of the first quarter next year, the companies said. The combined company will have 58,000 employees.

Citigroup acted as lead financial adviser to Sherwin-Williams, which also received advice from JPMorgan Chase & Co. Jones Day and Weil, Gotshal & Manges LLP were legal advisers.

Goldman Sachs Group Inc. and Bank of America Corp. provided financial advice to Valspar, which had Wachtell, Lipton, Rosen & Katz as its legal adviser.

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