Sherwin-Williams deal for Valspar raises antitrust concerns

Sherwin-Williams Co.’s $9.3 billion deal to buy rival paintmaker Valspar Corp. drew skepticism from investors over its chances for antitrust approval without significant divestitures.

Valspar shares topped out at $105 in trading Monday, reflecting a provision in the agreement that allows Sherwin-Williams to trim the per-share offer to that amount from $113 if regulators require the divestiture of assets that generate more than $650 million in revenue.

The assumption is “they wouldn’t have put those contingencies into the deal structure if there wasn’t a meaningful chance they might trigger them,” said John Roberts, an analyst at UBS Securities.

John Morikis, chief executive officer of Sherwin-Williams, is forging the company’s biggest deal ever less than three months after succeeding longtime CEO Christopher Connor. Sherwin-Williams, which gets 84 percent of sales in the U.S., gains a company that generates almost half of its revenue abroad while also adding coatings for coils and packaging. Valspar will help Sherwin-Williams expand in the Asia Pacific region and Europe, Morikis said in an interview.

“This accelerates the strategy we have long had in place,” Morikis said by telephone Sunday. “Valspar is a company we have long admired.”

Morikis said the company expects antitrust regulators will require minimal divestitures at most. Sherwin-Williams can terminate the agreement if more than $1.5 billion of divestitures are necessary for antitrust approval.

One area of antitrust scrutiny will be North American house paint sales to do-it-yourself customers, which are primarily sold through big-box retailers such as Home Depot Inc. and Lowe’s Cos., Roberts said. Acquiring Valspar eliminates one of that market’s four primary suppliers, which also includes Sherwin-Williams, PPG Industries Inc. and Masco Corp., said the analyst. He recommends holding Sherwin-Williams shares and doesn’t rate Valspar.

Don Caron, an analyst at Susquehanna Financial Group LLP, said the companies compete in the U.S. house paint market through different channels. Valspar sells to consumers through the big-box retailers while Sherwin-Williams focuses on selling to contractors through its company-owned stores. Sherwin-Williams has about 30 percent of the North American architectural paint market and Valspar has about 10 percent, he said.

Sherwin-Williams paint stores and brands such as Dutch Boy, Easy Living and MAB helped generate sales of $11.3 billion last year. The company will add $4.39 billion of Valspar revenue from brands such as Valspar Ultra and Duramax, 12 percent of which comes from China and 7 percent from Australia, according to data compiled by Bloomberg.

The deal “makes a ton of strategic sense,” said Dmitry Silversteyn, a Cleveland-based analyst at Longbow Research who has buy recommendations on both companies. It boosts Sherwin-Williams’s sales to U.S. do-it-yourself paint customers, international markets and industrial coatings markets, three areas where the company is under-exposed, he said in an email Sunday.

The combination also will catapult Cleveland-based Sherwin-Williams from the world’s third-largest paint company to first, surpassing industry leader PPG Industries and Akzo Nobel NV, Morikis said. Minneapolis-based Valspar is ranked No. 4.

Sherwin-Williams dropped 4.4 percent to $275.89 at 11:59 a.m., the most in six weeks. The shares have more than tripled in the past five years, while Valspar’s stock has more than doubled.

Sherwin-Williams abandoned a bid in 2014 to acquire Comex, Mexico’s largest paint company, after Mexican regulators blocked the sale.

Including $2 billion in Valspar debt that Sherwin-Williams will assume, the transaction is valued at $11.3 billion, Sean Hennessy, chief financial officer of the acquiring company, said by telephone. The equity purchase will be financed with $8.3 billion of new debt and $1 billion of cash, he said. The company said it has committed bridge financing from Citigroup Inc.

Sherwin-Williams said it expects to wring $280 million of annual savings from the combination within two years, eventually rising to $320 million. The deal should close by the end of the first quarter next year, the companies said. The combined company will have 58,000 employees.

Sherwin-Williams will pay $113 a share, the companies said. The price is about 35 percent higher than Valspar’s closing price of $83.83 on Friday, when its market value reached $6.63 billion.