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Sherwin-Williams Loses Bid to Paint It Black in Mexico

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There's no whitewashing it: Sherwin-Williams (NYSE: SHW  ) once again getting rejected by Mexico's competition commission over its bid to acquire Mexican counterpart Consorcio Comex is going to leave a stain.

The paint-maker had hoped to add the 3,300 stores Comex operates through hundreds of concessionaires with a $2.4 billion offer, but the Federal Competition Commission of Mexico said the union would create a paint powerhouse that threatened competition and would harm smaller, independent paint dealers. Sherwin-Williams appealed the original rejection back in July, but the commission wouldn't budge and said the deal is not approved.

Sherwin-Williams did get a consolation prize by acquiring Comex's U.S. and Canadian operations for $90 million cash and the assumption of $75 million worth of debt, but the real jewel was the Mexican business.

Comex is to Mexico what Sherwin-Williams is to the U.S., only better. While it generated $935 million in revenues last year compared to $9.5 billion by Sherwin-Williams, it is the name in paint throughout Latin America and would have melded well with its U.S. counterpart's business, which generated $828 million in sales on its own in the region. It would have been an easy way to grow sales in the Americas, which as Sherwin-Williams CEO Christopher Connor noted at the time of the acquisition announcement, "No other potential acquisition comes close to providing the same benefits to Sherwin-Williams as Comex."

Which explains why the paint-maker's stock tumbled sharply this past summer when Mexico rejected the bid. Everyone had expected the commission to give it a green light, just as regulators in the U.S. and Canada did, but then again, the combined company would have had an estimated 48% to 58% market share in Mexico, more than 10 times the nearest competitor.

The Latin America region is growing in importance every year to the global-coatings market, and it's on track to consume 10% of total paint volume. Analysts estimate that as key for Sherwin-Williams, since the region comprised 14% of DuPont's (NYSE: DD  ) global paint and coatings sales of $5.3 billion, 13% at RPM (NYSE: RPM  ) , and 11% at AkzoNobel.

Sherwin-Williams recently chopped off the Latin America division from its global-finishes segment as a means of highlighting the importance the region is to the paint-maker. There are still options it has to convince the commission -- or the courts, if it chooses that route -- that it can make a competitive player in Mexico, such as giving up large swaths of the market. That of course makes the overall deal less attractive, but doesn't get it hit with the ugly stick.

It's not unprecedented for the commission to block such acquisitions: Last year it nixed Nestle's attempted purchase of Pfizer's baby food business because it would have given Nestle an estimated 71% to 88% share of the market. But considering America Movil has north of a 70% share of the mobile communications market and Anheuser-Busch InBev's Grupo Modelo owns a 57% share of the beer market, it's not as if the commission has been consistent with its concerns bout market muscle.

At this point, though, Sherwin-Williams looks like it will have to paint the region black with profits through its own efforts and not via a growth-by-acquisition strategy that might have been hard to swallow anyway because of its size.

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