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With DuPont (NYSE: DD) already on the buyout block, another big combination looms in the industrials and materials industry: Sherwin-Williams (NYSE: SHW) plans to acquire competitor Valspar (NYSE: VAL) for $9.3 billion. Shares of Valspar soared 25% on the news.
Sherwin-Williams is a $26 billion paint retailer that competes with Home Depot (NYSE: HD) and Lowe’s (NYSE: LOW) in the retail paint industry.
Shares of Sherwin-Williams are essentially flat over the last year, while Home Depot has soared 15%. Nonetheless, Sherwin-Williams is trying to close the gap by acquiring the $8 billion market cap paint supplier Valspar.
Sherwin-Williams Will Be No. 1
This is a landmark deal for Sherwin-Williams. It’s the company’s largest acquisition since it paid $830 million in 1996 for Minwax.
With the acquisition, Sherwin-Williams becomes the largest paint and coatings company in the world. The deal should prove to be immediately accretive to Sherwin-Williams, giving it access to Valspar’s franchises and expanding its business in Asia and Europe.
The combined company will have close to $16 billion in revenue and $3 billion in earnings before interest taxes depreciation and amortization.
Favorable Terms
The deal gets even better for Sherwin-Williams. It’s managed to negotiate favorable terms for its purchase price of Valspar. As well, Sherwin-Williams could pay even less if regulators force the company to divest assets before approving the deal.
Sherwin-Williams can drop its offered price of $113 a share down to $105 if there are divestitures that require it to dump more than $650 million in Valspar revenues. If the divestitures become too aggressive (more than $1.5 billion of 2015 revenues), Sherwin-Williams has the option to terminate the deal altogether. But neither company expects any divestitures at all.
Sherwin-Williams has been scouting for acquisitions for several years. In 2012 it tried to buy Consorcio Comex, the Mexico-based paint maker, but the deal was blocked by regulators. PPG Industries (NYSE: PPG) ultimately purchased Comex’s Mexican operations.
At the time, Sherwin-Williams wouldn’t divest its own Mexico operations and wouldn’t accept terms that would force the Sherwin-Williams name out of Mexico in perpetuity. Comex shareholders sued Sherwin-Williams, saying that the company failed to give its best effort in trying to meet regulatory approval for the deal. The terms for the Valspar deal show that Sherwin-Williams isn’t taking the risk of overpaying this go around.
Dividend Potential for Investors
The move is a big one for investors. It will put Sherwin-Williams on better footing with the competition and also makes the paint giant a dividend machine. Right now, Sherwin-Williams offers a 1.2% dividend yield and Valspar pays 1.3%.
On the surface, Home Depot has the better dividend at a 2.1% yield. But Sherwin-Williams and Valspar are both paying out less than 30% of their earnings via dividends. Sherwin-Williams thinks the deal will generate more than $300 million in cost savings over the long term. That is money that can be used to boost the dividend.
Sherwin-Williams also has a 37-year streak of consecutive dividend increases and Valspar has its own 34-year streak. Not even Home Depot can compete on that front. Home Depot pays out 50% of its earnings via dividends and has just a three-year streak of dividend increases.
The big downside is that Sherwin-Williams will have to raise debt for the deal, putting its balance sheet in an even weaker position compared to Home Depot and Lowe’s. But over the long term, the deal (expected to close by the end of March 2017) should be a big positive, with Sherwin-Williams becoming an even greater play on the housing construction market after the Valspar purchase.
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