PPG/Akzo – A Smart Deal Rather Than a “Me Too” Acquisition/Merger

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Graham Copley / Nick Lipinski

203.901.1629/203.989.0412

gcopley@/nlipinski@ssrllc.com

March 9th, 2017

PPG/Akzo – A Smart Deal Rather Than a “Me Too” Acquisition/Merger

  • A PPG/Akzo combination has been one of the more obvious large “doable” deals in the Chemical sector for years, but both companies have been focused on other strategies and it appears that the timing may be right now – at least for PPG.
    • In our view this is a better strategy for PPG than chasing multiple smaller architectural deals like COMEX.
  • Lessons learned and moves already made over the last 5-6 years may make this much better (probably for both sides) than it would have been 5-6 years ago.
    • PPG’s radical portfolio changes have put the company in a much stronger relative position to Akzo than it was in the past:
      • Higher multiple
      • Better balance sheet
      • PPG can pay a fair price for Akzo and still deliver upside to its shareholders
    • PPG management has successfully exited a commodity chemical business in a structured deal that created significant shareholder value.
      • They can do it again.
      • The timing is likely to be good as the chlorine chain is improving.
    • The dollar is stronger.
    • Interest rates remain low.
  • As shown in the Exhibit below and included in our original work on Akzo – redistributed last night – Akzo’s coatings businesses are not great – and certainly not as good as PPG’s.
    • This provides PPG with a platform for improvement which should drive margin improvement and earnings growth for years.
    • This is above and beyond the synergies, which we would expect to be well in excess of $1.5bn.

Exhibit 1

Source: Capital IQ, Company Reports, and SSR Analysis

  • Akzo is claiming that PPG’s bid is unwelcome and that they will pursue the separation of the chemical business alone. This could also create significant shareholder value for Akzo, but PPG should be able to create more value and we do not believe the company will simply give up.
    • Akzo holders should want and expect a higher offer from PPG.
    • Akzo has limited net debt and PPG could significantly increase EBITDA as well as orchestrate a value creative exit from the chemicals piece – this implies a higher value for the equity than reflected in the stock price this morning.
    • We would expect PPG to offer well in excess of where the stock is trading this morning by the time all the dust settles.
    • We would not be surprised to see a deal closer to 90 Euros per share for Akzo. This would be a 40% premium over where the stock traded yesterday.
  • Akzo has been our top pick in coatings for a while – it remains so, but PPG could create something interesting here in what is otherwise a challenging environment for the company. PPG is inexpensive (trading at or close to fair value, while SHW and RPM are well above fair value) and this deal could be the catalyst to drive the stock higher
    • Otherwise we would stay away from the coatings sector based on valuation, some peaking markets and some raw material headwinds.

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