And then there were three. The coatings industry was further transformed on March 20th, 2016 with the surprise purchase of Valspar by Sherwin Williams. Why did we see a Sherwin Williams Valspar merger? What does this mean for the coatings industry? Are there any broader implications of this deal?
First, the details of the purchase itself: Sherwin paid a 41% premium to Valspar’s closing price on March 18, 2016, and 28% higher than Valspar had ever traded.
Sherwin’s rationale for the deal is consistent with what we have seen in the hundreds of deals in the coatings sector over the last few years – consolidate the market, expand into new markets (products and geographies), and “synergies” which is fancy corporate speak for fire a bunch of people and close facilities.
Valspar gives Sherwin a much bigger international business (50% of Valspar’s business is outside of North America); dramatically boosts Sherwin’s industrial business by expanding into packaging and coil coatings and bolstering their general industrial coatings; vertically integrates them further into resins; and will allow Sherwin to offer more architectural products through their existing store network.
The Sherwin Williams Valspar marks the largest in a multi-year binge of consolidation in the coatings space. Sherwin Williams and Valspar both had been on the prowl for acquisitions as of late, though they have been nowhere near as active as PPG. Sherwin failed in its bid for Comex’s main Mexican business and had to settle for the USA / Canadian segment (about 234 US stores and 80 Canadian). Valspar acquired Inver group in June of 2013.
While the deal likely faces antitrust issues, the impact on the coatings industry is transformational. There is now a trifecta of three major global suppliers of almost equal size:
Sherwin Williams Valspar Merger: $15.6 bb in revenue
PPG $15.3 bb of revenue
Akzo €14.9 bb of revenue
The global coatings market is approximately $130 bb in annual revenue. Approximately 43% is architectural (house paint); 28% general industrial, and then a range of other uses. These 3 players will now have about 36% market share.
Figure 1: Global Coatings market
Figure 2: Architectural Coatings market
The source of potential antitrust issues in the USA will come down to how distribution in the architectural coatings side of the business is understood by regulators. There are 3 basic channels – independent stores, big box stores, and company owned stores. In the USA, the split is about equal between channels – 35% company stores; 35% independents and 30% big box. Independents have been shrinking, losing share to big box and to company stores.
However, these channels don’t reflect another obvious yet subtle difference – the do it yourselfers (around $5 bb market) versus the professionals (do it for me, around $6 bb) market. The DIY market dominated by Behr, Valspar, Sherwin, Glidden, Benjamin Moore. This deal will make Sherwin / Valspar the dominant player. The “professional” market is really a competition between Sherwin and PPG. The DIY market is where the antitrust issues could arise.
So what does this deal tell us about the coatings industry?
Consolidation has completely reshaped the market. The era of many viable, private mid-size players is rapidly coming to an end. The coatings trifecta will continue to hunt for the next major acquisition until either interest rates rise or there are no viable sellers left. These huge monoliths will have to deal with integration after integration. They will bring size, resources and name to bear on every deal. Potential purchasing advantages may or may not materialize, and the systems and process required to manage companies at this scale are daunting.
In this hides an enormous opportunity for smaller players. Big companies are usually less flexible, less rapid to respond to customers, require more standardization, and find it difficult to service in a unique way the demanding nature of a coatings customer. Smaller players can fill the gap with customers looking for more flexible and responsive suppliers.
What does this say about the current climate of business in the U.S?
We are sadly in a time that favors big public companies over smaller, private players. Complex tax schemes that result in the big corporations paying little or no taxes. Big companies benefit from low interest rates due to their access to public markets. The increasing regulatory burden in the chemicals sector in particular and the overall US economy subjects all businesses to huge and growing costs. Large companies can spread these costs over their larger revenue basis.
Sadly for America, big companies tend to shrink employment – whether it is the top 100 companies in the S&P or the biggest in the coatings industry. Multiple studies have demonstrated this over many time periods. Employment in the manufacturing sector has shrunk immensely since 1982’s peak of 18 million. In coatings, I expect the trifecta to focus on reducing headcount. Akzo has shrunk employment by 28% since 2008. PPG has kept employment essentially flat since 2008. While Valspar has grown employees over the last few years, it is clear this deal will result in layoffs.
Overall, I think this deal is a big win for Valspar’s shareholders, a strategic win for Sherwin, and a loss for the workers at both companies. It exposes the continued rising inequity in the US economy. But in this is an opportunity for the smaller players, and I am excited to see what the innovative and industrious coatings industry will do over the coming years.
Source: Painting Pro Times, 3/29/16. Author: Stephen Kawaja. Sherwin Williams Buys Valspar