Monday 21 August 2017

Share watch: Plucky Akzo Nobel has set the bar high for itself

A lot of experts considered that Akzo, which has operations in 80 countries, employs 46,000 people and has a market value of €20bn, would be an ideal fit for PPG
A lot of experts considered that Akzo, which has operations in 80 countries, employs 46,000 people and has a market value of €20bn, would be an ideal fit for PPG

John Lynch

Active investors like nothing better than a decent slug-it-out takeover battle and one of the best corporate ding-dong in years is the fight for control of Akzo Nobel, the Dutch paints and coatings giant and producer of Dulux. For months, it has been fending off the attention of the US concern PPG Industries.

A lot of experts considered that Akzo, which has operations in 80 countries, employs 46,000 people and has a market value of €20bn, would be an ideal fit for PPG.

While Akzo has its roots in the 17th century, its present incarnation stems from 1984, when it merged with Noble Industries.

Today, Akzo, based in Amsterdam, has three divisions - specialty chemicals, coating and paints - which are not only world-class operators but have global footprints.

Its specialty chemicals have a portfolio of more than 2,000 products and are used in the making of soap, soup, ice-cream, plastics and even asphalt.

Akzo's global coating business is its largest and this also happens to be PPG's main line of business. The companies are competing for the same customers in many industries, ranging from construction, ships and cars to mobile devices.

An additional interest to the US concern is Akzo's Asian market, which generates half of its coating revenues (€2.85bn), well ahead of PPG's.

Akzo paints, like the coating business, is also highly attractive given that it is the biggest supplier of paints in the world.

PPG itself is no slouch. The company was founded in 1883 as the Pittsburgh Plate Glass company. Today it produces a broad range of coating and specialty materials, including fibre glass. It employs 47,000 people, has 140 manufacturing facilities in 40 countries, sales of €13.6bn, (Akzo €14.2bn) and a market value of €26bn, with a price earnings multiple of 19, similar to Akzo.

Early this year, PPG launched its bid, worth €21bn, for Akzo, which was instantly rejected. Within days, PPG increased its offer to €24.5bn; again, it was turned down. By the end of April, the bid had been upped to €27bn - to no avail.

PPG even hinted it might go hostile. Then along came the active and aggressive US hedge fund, Elliott Advisors. With only 4pc of the shareholding, it launched legal action (as it did on Argentine bonds) to oust the Akzo chairman and replace its directors with its own nominees - a ploy it has used before. What made this action interesting was that Akzo has a unique and decades-old Dutch anti-takeover defence that makes it almost impossible for shareholders to overthrow the company's board and install new directors. Elliot lost its legal action.

Meanwhile, PPG Industries had been the subject of dark mutterings. Its sales last year at $14.7bn (€13.6bn) are the lowest in the last three years. Net earnings are not much better, showing a decline from $2bn in 2014 to $877m last year. It was whispered that the PPG bid may well have been aimed at diverting attention away from its static sales and flagging profits.

In the end, the Akzo resistance seems to have won the day. At the beginning of June, PPG retired from the battle and the rules dictate that it cannot consider re-entering the pursuit for another six months.

But that may not be the end of the story. Akzo, in its stout-hearted, three-month defiance, put a lot of noses out of joint.

Influential investors are now saying that their interests were not prioritised. The share price today trades at €77, down from the bid price of €96. Indeed, Akzo has pretty much conceded as much. Consequently, it may have to sell or spin-off significant businesses in the next year (specialty chemicals the favourite) and do other things to create value that's commensurate with the promises inherent in the PPG bid.

It has set the bar very high for itself. It needs a return on worldwide sales of 14pc in the next three years, a big improvement on recent returns. It means decent volume gains, higher prices and lower input costs.

Will it happen? The sceptics think not. Others disagree and think the share is worth a punt.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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