Intensified M&A activity in the European coatings industry

The competition between Akzo Nobel, PPG and Haihong Elder for the acquisition of Tikkurila shows that in the next 1-2 years, more acquisition battles may occur in the European coatings industry.

The three companies made an offer to acquire each other within a few weeks from December to January. Tikkurila is the leading paint company in the Baltic region for decorative paints.

After PPG made the first bid in December, the old man Haihong made the offer, and then Akzo Nobel made the offer in January.

Regardless of the final result, the trilateral war shows that the coatings industry and other industries in Europe have entered a period of integration and reshuffle after the epidemic.

As of January 2021, the total number of cumulative confirmed cases in Europe is approximately 20 million, and the death toll is more than 500,000.

Due to the health crisis and the accompanying economic recession, many companies are in financial trouble and either choose to go bankrupt or be acquired.

The funds needed by others can only be obtained through acquisitions.

For potential predators, the post-epidemic era provides an opportunity to gain a stronger defensive position in the market.

This will be an opportunity to expand into market segments where they believe they lack geographic locations or have gaps in their portfolio due to technical weaknesses.

Many paint companies that have large amounts of cash for acquisitions are often lucrative decorative paint businesses that performed well during the epidemic.

In Europe, the demand for decorative coatings is increasing, especially during COVID-19 through online purchases.

In some countries, there has been a DIY boom. Consumers hope to use home office hours as an opportunity to beautify their homes.

Decorative paint manufacturers have been able to use strong demand to maintain or increase sales prices, while benefiting from lower raw material prices and cost compression.

In the third quarter of last year, Akzo Nobel increased the sales profit margin of decorative coatings to 21%, compared with 14% in the same period last year.

In the first nine months of 2020, the company's return on sales (ROS) for decorative coatings rose from 12% in the first three quarters of 2019 to nearly 17%.

In surveys of mergers and acquisitions strategies of companies with good balance sheets in Europe, executives have been telling analysts that their goal is to balance acquisitions and divestments.

In coatings and most other industries, large deals like PPG's $26 billion acquisition of Akzo Nobel in 2017 seem to be rare. On the contrary, perhaps with a few exceptions, $2 to $3 billion in transactions may be the upper limit.

PPG has been expanding its decorative coatings business in Europe through the acquisition of leading local brands and regional supply chain operators.

The main attraction of Tikkurila's ownership to PPG is that the Finnish company has established a comprehensive distribution network in the Nordic region.

Akzo Nobel’s CEO Thierry Vanlancker made it clear to analysts at the annual performance meeting in Amsterdam in February 2020 that his main interest in future mergers and acquisitions is “additional items” rather than block transactions.

In October last year, it acquired the decorative coatings business of Spain Industrias Titan, which, like Tikkurila, is a well-known regional brand with a high reputation for sustainable development.

The Danish-based private paint company Haihong Elderly has only recently emerged in the European decorative coatings field and has expertise in the field of private-label coatings.

After Haihong old man acquired German J.W.Ostendorf and its French subsidiary Renaulac in 2018, and merged it with the British Crown Coatings that it took over in 2011, the company recently established a European decorative coatings business unit.

"When [due to COVID-19], the world shuts down in 2020, and global operations, including us, face challenges, we have accelerated the strategy formulation process," Group President and CEO Lars Petersson said in a statement in January Say.

Lars Peterson, President and CEO of Haihong Elderly Group, said in a statement in January this year: “Due to COVID-19, the world will be closed in 2020, and when our global business, including us, is challenged, we have accelerated the strategic process. "

"Now, we have laid the foundation to not only double revenue, but also greatly increase the positive impact on customers, partners, and employees. We will establish a leadership position and invest in our core areas, and we will be able to Continuous development is at the core of our business."

The company's goal is to achieve 50% revenue growth through mergers and acquisitions, and occupy a leading market position in the four major fields of decoration, marine, infrastructure and energy, and the current proportion is less than 10%.

Peterson added: "Our business is too thin and too shallow, so our business focus is to withdraw our own business from certain regions and strengthen other businesses."

If Akzo Nobel’s bid for Tikkurila is successful, Haihong Elderly will acquire Akzo Nobel’s decorative coatings business in Northern Europe and the Baltic Sea.

This will help AkzoNobel avoid antitrust issues with the EU and national competition authorities.

One of the main drivers of mergers and acquisitions in the European coatings and other specialty chemicals industry is their relatively high stock market valuations.

According to data from Valence Group, an investment expert based in New York and London, the valuation of coatings companies (calculated as a multiple of earnings before interest, taxes, depreciation and amortization) is 50% to that of commodity chemical companies. 60%, even in 2020, which is affected by the epidemic.

During the recovery from COVID-19, this gap may widen.

This will satisfy the private equity companies that have been particularly active in paint M&A in recent years.

For manufacturers of the booming decorative coatings business, an uncertain factor is that once COVID-19 retreats behind the scenes, the enthusiasm for DIY will weaken, and what impact this will have on the profitability of the decorative business.