M&A: Breakout after the outbreak?

In the current exceptional circumstances (Covid-19 and raw materials), we are observing growing M&A activity in the coatings industry. The pandemic has hit market segments in different ways. Whereas architectural paints and building protection are actually benefiting, automotive OEM paint manufacturers are suffering heavy losses. As for the industrial coatings segment, the picture there is very mixed. Against this background, there is a optimistic mood in the market. Consolidation trends, which we have been expecting for several years, are now definitely gaining momentum.

Many companies in the coatings industry are increasingly coming to realise that consolidation offers considerable synergistic effects – in the form of both sales growth and savings, especially when it comes to purchasing raw materials (pigments, resins, etc), and other costs. Analyses of previous M&A transactions show that synergistic effects can more than double the combined EBITDA of the two participating companies.

In January 2021, US paint maker PPG announced its intention to take over Finnish construction paints and coatings manufacturer Tikkurila. The board justified this strategic decision by referencing the considerable synergistic effects that would result from the merger. That same month, Akzo Nobel also joined the race – and outbid its US rival, even though PPG and Tikkurila had already reached an agreement. PPG then raised its bid for Tikkurila, whereupon Akzo withdrew. This example illustrates the current momentum and appeal of the paints and coatings industry for M&As.

The right time for buyers and sellers?

Company valuation levels in the coatings industry are running high at the moment, despite – or because of – the unusual situation engendered by the pandemic, with the market for business participation characterised by increased market valuations, high liquidity and enormous investment pressure exerted by financial investors. Many companies in the industry have considerable equity capital at their disposal – and debt capital, too, is widely available at attractive conditions.

This situation can generate potentially attractive sales revenue for shareholders that are willing to sell. But appropriate financing options are also available for companies that are willing to buy. Richly valued, market-listed companies can afford to pay attractive purchasing prices while still creating value in the eyes of their shareholders.

Covid-19 as an M&A catalyst

As in other industries, it is evident to us that the pandemic is affecting the various segments of the paints and coatings industry in different ways. The architectural paints and building protection segment has developed positively due to the DIY boom that has resulted from the coronavirus. For investors in this segment, an acquisition may even be more financially viable now than before the outbreak of the pandemic.

The industrial coatings segment (excluding automotive) has a very heterogeneous structure. In some cases, the pressure to consolidate in this segment has intensified and is being applied by the big players in particular. Thus, Maasaki Tanaka, CEO of the Japanese paint and coatings giant Nippon Paint, said unequivocally in October last year: “When the entire market is down, there will be industry realignment opportunities for a company like us with financial firepower and stable management.”

Record values on capital markets

On the capital markets, companies in the sector are being valued at record levels, with EBITDA multiples of between 15x and 25x for listed major players.

Even if the valuation multiples for SMEs are discounted, high purchase prices are being paid in this segment. Due to increased M&A activity, we expect multiples to move sideways at current levels over the medium term. This combination of high valuation levels and high competitive pressure is creating an attractive environment for sellers and a good time for potential sales.

The buyer groups

For European companies, strategic investors – especially the stock-market-oriented types – remain the dominant buyer group, due to their own high valuations and the high potential to enhance their value through synergistic effects. There is little sign of financial investors so far.

Industry has since adjusted to Covid-19 and now, more than ever, is in the mood to go on a transaction spree. The bidding war for Tikkurila between arch-rivals Akzo and PPG, with the participation of Denmark-based Hempel Group, is not the only exemplar of this development. PPG’s acquisitions of Wörwag and Ennis-Flint are also examples of major take-overs in recent months. For anti-cartel reasons, it is likely that Akzo Nobel would have had to divest its DIY business in Scandinavia and the Baltics if its bid to acquire Tikkurila had gone through.

Opportunities and threats for SMEs

For SMEs, this situation offers considerable opportunities while simultaneously posing threats. Companies that are willing to sell can expect high valuations in the current market climate. Acquisitions, too, can help them to boost profitability through synergistic effects and thus to compete financially against the big players in the industry. At the same time, however, M&A strategies pose major challenges for SMEs when it comes to execution. SMEs possess in-depth operational know-how and industry expertise, but often have less-well developed M&A competencies.

For many reasons, we are currently not expecting any substantial rise in company valuations over the medium term. Valuation levels are very high, both historically and relative to other industries, and interest rate hikes with their direct negative impact on equity markets no longer seem out of the question. We therefore tend to see a greater risk that valuations will decline.

Remark: This is a shortened article from issue 07/08 – 2021 of the European Coatings Journal. The full version with more information on SMEs, a more detailed take on buyers and sellers side are available at our online library European Coatings 360°.