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Breakingviews - Nippon Paint's run at Axalta looks off-colour
November 22, 2017 / 5:34 AM / in 23 days

Breakingviews - Nippon Paint's run at Axalta looks off-colour

By Quentin Webb

Thierry Vanlancker, CEO of AkzoNobel poses for a portrait at the opening of the company's new paint factory in Ashington, Britain September 12, 2017. REUTERS/Phil Noble

HONG KONG (Reuters Breakingviews) - Nippon Paint’s run at Axalta looks less than brilliant. The $11 billion Japanese company has lobbed in a cash bid for its U.S. rival, according to Reuters, killing the target’s merger talks with Akzo Nobel of the Netherlands. A deal valued at some $12 billion including debt, even assuming hefty savings, would destroy value. Fulfilling global ambitions may be costly.

Unlike some Japanese outfits, Nippon Paint already has substantial operations beyond its home market, thanks partly to closer cooperation with Singaporean billionaire Goh Cheng Liang, who now owns 39 percent. The region outside Japan accounted for 58 percent of the company’s total sales and 54 percent of operating profit in the year to September.

It is small in the Americas, however, even after a $608 million takeover of Dunn-Edwards late last year. Broader consolidation efforts also threaten Nippon Paint by creating far bigger rivals with serious economies of scale. PPG unsuccessfully tried to buy Akzo Nobel after Dow and DuPont announced plans to unite and Sherwin-Williams acquired Valspar. Nippon Paint Chief Executive Tetsushi Tado has vowed to create a “global paint major” with 1 trillion yen, or nearly $9 billion, in annual sales.

Axalta would be a pricey way to do it. Suppose Nippon Paint offers $37 a share, slightly more than 30 percent over Axalta’s undisturbed share price. With $3.3 billion of debt plus some bid expenses, the total outlay could hit $12.5 billion.

Blending paints does create sizeable financial benefits. Savings have averaged 3.8 percent of combined costs at three acquisitions in the industry. That suggests Nippon could hack out about $330 million worth. Even then, the deal would only generate a 5.9 percent return on investment, according to Breakingviews calculations. That badly undershoots the target’s cost of capital, which Morningstar estimates at 8.5 percent.

That might not be enough to take the gloss off the deal for Nippon Paint. Jefferies analysts reckon it could be happy with a 5 percent return on invested capital, which, with debt costing just 2 percent, could be achieved even if were to pay $43 a share. If Nippon Paint approaches it that way, life could yet get more colourful for Axalta shareholders.

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