PPG Paints Over Sherwin-Williams Failure

Coatings specialist seeks to acquire Mexican paint giant that its rival failed to nab.

Jul 7, 2014 at 3:02PM


Months after Sherwin-Williams (NYSE:SHW) failed in its quest to buy Mexican paint giant Comex because regulators feared it would have too much control over the market, rival PPG Industries (NYSE:PPG) announced last week it was acquiring the coatings specialist south of the border -- and paying roughly the same amount of money previously offered.

Consorcio Comex SA is Mexico's largest paint and coatings specialist with 3,600 paint stores operated by concessionaires, or franchises, making it second in size in the region only to Sherwin-Williams itself, which has over 3,900 stores. It was the better than 50% market share the two industry giants would command that worried Mexico's Federal Economic Competition Commission, because it would make the combined company more than 10 times larger than its nearest competitor.

Although 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, the real jewel was the Mexican business, and PPG doesn't believe it will face the same kind of concerns that its rival did because its business is focused more on automotive coatings rather than in household paints or those used in construction activities. 

Yet Comex will still coat PPG's operations with plenty of growth. The Mexican painter generates approximately $1 billion annually in revenues that will more than double PPG's Latin America division sales to 11% of its total sales from the current 5%. 

The Latin America region is growing in importance every year to the global-coatings market, comprising 14% of DuPont's (NYSE:DD) global paint and coatings sales of $5.3 billion, 13% at RPM (NYSE:RPM), and 11% at AkzoNobel (NASDAQOTH:AKZOY).

PPG, however, has been on a buying spree. It closed on its purchase of architectural coatings maker The Homax Group just days after announcing the Comex deal. Last year it purchased Akzo Nobel's North American architectural coatings business, Deft's specialty coatings business, and in March of this year bought Hi-Temp Coatings Technology's protective and marine coatings business. PPG's first quarter earnings report showed revenues surged 17% from the year ago period largely due to acquisitions its made in the past year.

Although some analysts think it will run into trouble with Mexican regulators, PPG was seen as the natural successor to bid on Comex after Sherwin-Williams' acquisition attempt fell apart, estimating at the time it would add as much as $0.80 per share to its earnings. PPG itself hasn't disclosed how Comex will benefit its bottom line, but finds Comex's business "very complementary" to its own, and says it will finance the deal with a combination of cash and short-term investments, but may also fund a portion of the purchase price through the addition of debt. The coatings specialist reported it had $3 billion of cash and investments on hand at the end of March.

PPG still has to confront a mixed European market as last quarter volumes there overall improved by 4% but were decidedly mixed based on region and country. Still the Comex deal strengthens its Latin America business and makes it a tougher adversary for Sherwin-Williams to confront. That is, if it makes it through the regulatory process. PPG's rival also thought it would be easy to navigate but quickly learned that Mexico is intent on protecting its smaller shops. 

Outsized dominance might not be a factor, but it's a concern that PPG Industries can't whitewash until it receives the stamp of approval.

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