IEX, Nico Inberg - March 23 2017
https://www.iex.nl/Column/262568/AkzoNobel-Verf-weg-chemie-houden.aspx
AkzoNobel: Sell paint and keep chemicals?
Today, senior management of PPG visit the Netherlands to find out whether they can rally the press
behind them. A meeting with CEO Büchner or Antony Burgmans, Chairman of the Supervisory Board,
will apparently not happen.
That’s outrageous because PPG’s offer for AkzoNobel should definitely be taken seriously. It is not a
private equity firm but one of the largest players in the industry, which wants to further strengthen
its global position with the paint division of AkzoNobel.
Paint producers - and actually it’s the same everywhere - want to be relevant and therefore number
1 or 2 in every industry sub-sector. Only in this way can you earn good money. While there is quite a
bit of overlap, Akzo complements PPG in those sub-sectors.
Look at the market positions of the two parties:
AkzoNobel’s credibility at stake
For CEO Ton Büchner it is increasingly difficult to explain why he thinks a takeover by PPG is not a
good idea. The offer is 38% higher than the previous closing price (64.5 Euros). The argument that
PPG significantly undervalues his company is therefore incomprehensible. What has management
been doing all those years, if the company was worth 100 Euros or something like that?
A CEO should not blindly focus on share price, but one of management’s tasks is that the value of the
company is reflected in the performance of the share.
AkzoNobel has failed in that. Now that someone’s knocking at the door with a bag of money
suddenly things are starting to move. Shareholders are stirring, and for the moment it’s the new
shareholders that smell money.
They see a company with a share price of 65-75 euros, while someone else wants to pay about 90
euros.
Yes, you can now even build a substantial interest with CFDs. In that respect, Elliott Singer is not just
anyone, he already brought Argentina to its knees. He bought that country’s government bonds and
go via a lawsuit got them to pay out.
Behind the dikes
Akzo is now trying to hide behind the dikes in the hope that politicians, trade unions and provinces
help them solve the matter.
Let's examine the six reasons that Buchner gave for refusing the takeover. They are mostly fallacies.
I’ll walk you through the list of six reasons:
1. Is not in the best interests of shareholders. It Substantially undergraduate values Akzo Nobel
and fails to reflect the value creating opportunities of the new strategic direction and focus for
both the Specialty Chemicals and the Paints and Coatings businesses, allowing them to build
further on their respective leadership positions.
Point 1, of course, doesn’t make sense. The share price before the bid was 64.5 euros, so the bid is
representing a premium of 38%. They haven’t yet negotiated, and the performance of the Akzo share
in previous years hasn’t been much higher either.
2. Contains significant risks related to the increased stock component and the high leverage of the
proposed combined businesses.
Risks regarding the proportion of PPG shares is completely nonsense. Now the shareholder is 100%
at risk from Akzo's share, but later only 33% at risk from the PPG share. The higher leverage with PPG
is indeed riskier, but also brings more profit. Interest rates are low, and companies should/can
borrow more with a solid cash flow than bunglers on the stock market.
3. Would result in a large number of substantial divestitures due to the major geographical and
segment overlap of both companies.
Yes, antitrust legislation will ensure that some divisions have to be divested. Is that a problem?
4. Will lead to significant job cuts. It includes synergies which can be expected to result in the
restructuring of the combined employee base, leading to job losses.
This is even funny. The hunter talks about synergies, the prey about job losses. Everyone knows that
acquisitions are mainly done to create synergies. The booked amounts (ask Ahold) come mainly from
squeezing suppliers and staff reductions.
5. Does not address fundamental stakeholder concerns and uncertainties, nor does it substantiate
any tangible solutions in relation to, among others, R&D, pensions and employees.
Here PPG should have acted smarter. You should, of course, pamper your prey by resolving these
kinds of issues immediately. Propose to keep a R&D centre in the Netherlands for a few years, and
guarantee job security, or something. Currently, PPG only offers dollars for the shareholders.
6. Does not meaningfully address our concerns regarding community contribution and
sustainability and the significant culture gap between both companies, including how any issues
arising from this would be addressed.
Yes, the cultural gap between PPG and Akzo. Both paint cannons, operating in the same markets, but
with a different view on (creating) shareholder value. With PPG that is the top priority, at Akzo they
can’t quite get that job done.
In summary, for Akzo it will be difficult to keep PPG away. I can also imagine that the Anglo-Saxon
part of the Supervisory Board will become more critical. The chairman is Antony Burgmans, former
Unilever CEO.
Here are people who are old hands in international business. There is no shortage of skill, just look
below.
After the wailing over TNT and Unilever, it is time, with the Akzo story, to now listen to the owners of
the company: the shareholders. You cannot constantly keep hiding behind the dikes. I believe that
the Board should take responsibility and invite PPG to present its bid, even if CEO Büchner does not
want it. Büchner plays with shareholders’ billions and should examine the graph below. The
difference in performance between Akzo and PPG in the last decade:
The little upwards line is PPG’s offer. Both charts are in dollars. From an earlier article, another
comparison between the two companies.
AkzoNobel
PPG
Market Cap (billion euro)
16,2
24,6
turnover (billion euro)
14,2
14,0
46.000
47.000
Underlying net profit (million euro)
970
1462
Price earnings ratio
16,6
16,9
employees
Dividend yield
2,5%
1,6%
Market value/turnover
1,15
1,75
Despite the relatively modest dividend yield, PPG is still a dividend aristocrat. For 26 years in a row it
has not reduced its dividend.
The glassworks factory Pittsburgh Plate Glass, founded in 1883, is number 182 from the Forbes-500,
and a high performing S&P 500 company. In the early years too, the company grew quickly through
acquisitions. Takeovers are in its DNA.
The solution: sell paint, keep chemicals
Back to the bid. Why not reverse the situation? Akzo has done that previously with Organon. Sell a
large division, continue with another. Back then it sold the pills plant Organon for 11 billion euros
and bought a paint factory in the UK (ICI).
Now there is a buyer for the paint division (PPG does not want the chemical division either) with a
huge bag of money. Invest that money bag in the chemicals division, I would say.
Conclusion
Akzo, come out from behind the dikes and show yourself. Create shareholder value by engaging with
the proposal of PPG. If the Americans really want to pay the price, let them!
Continue with the chemical division and build a nice business around it. Everyone wants to divest its
chemicals division so there are opportunities. Plenty to do there. Give DSM a call.