Does Valspar Buy Mean Sherwin-Williams Sees Slow Growth Ahead?

Paint manufacturer Sherwin-Williams is looking to cover the globe with a deal for rival Valspar that gives it a bigger worldwide footprint. Photo source: Mike Mozart.

Paint maker Sherwin-Williams (SHW -0.25%) took a big step toward covering the world with a debt-included $11.3 billion bid for rival Valspar (VAL).

Although its logo is a can of red paint pouring over the globe, Sherwin-Williams is primarily a U.S.-based coverings manufacturer realizing some 84% of its revenues from domestic markets. Yet the pitch could mean the paint maker thinks growth prospects here in the U.S. are drying up.

After an attempt to diversify its geographic footprint by purchasing Mexico's Comex a few years ago failed over antitrust concerns south of the border, this acquisition could give Sherwin-Williams the international exposure it needs.

Valspar derived 46% of its $4.4 billion in annual revenues last year from foreign markets, primarily from China, where it realizes 12% of its sales, and Australia, which accounts for another 7%. The rest of the world added almost another 27% to the total.

Despite its global perspective, the merger also gives Sherwin-Williams additional exposure to the retail market. While its Dutch Boy and Minwax brands can be found in many retail outlets, the paint maker's primary target market has been the paint professional who shops at its nearly 4,100 company-owned stores. The paint stores division rang up $7.2 billion in sales last year, a 5% increase from the prior period and representing 64% of total revenues.

While Sherwin-Williams consumer division enjoyed a bigger 11% increase in sales, almost two-thirds (some 63%) of the $1.6 billion revenues it contributed were to the paint maker's other segments, mostly the paint stores.

The deal with Valspar will catapult Sherwin-Williams from the third largest coverings company to first place, with combined revenues of $15.7 billion in annual sales That puts it just ahead of No. 2 PPG Industries (PPG 0.11%), which had $15.3 billion in revenues last year, and comfortably in front of third place AzkoNobel (AKZOY 0.13%), which generated just under $13 billion last year.

Other players like Dow Chemical, which makes architectural paint and coatings, and RPM International, which owns consumer brands like Rust-Oleum, DAP, Zinsser, Varathane, and Testors, trail much further behind, which could create some antitrust concerns that the deal will reduce the major retail players from four to three, perhaps giving regulators pause about its impact on pricing.

Although the joint statement from the two companies said it didn't foresee they would have to complete any major divestitures, the $113 per share merger agreement (a 35% premium over Valspar's pre-offer closing price) included some curious caveats.

For instance, if Sherwin-Williams has to sell businesses valued at more than $650 million of Valspar's revenues, the purchase price will be lowered by $8 per share. If the total divestitures are more than $1.5 billion, Sherwin-Williams can back out of the deal. It's clear they realize the potential their tie up will have on reducing competition.

While Sherwin-Williams has some retail exposure through brands like Minwax, Valspar will give it greater reach into the consumer market. 

The industry has gone through some consolidation over the past few years. PPG, for example, ended up buying Comex, though Sherwin-Williams got the Mexican paint company's U.S. and Canadian division. PPG also bought Homax Group immediately afterwards. It purchased the North American architectural coatings business of Akzo Nobel; the Deft's specialty coatings business; and the protective and marine coatings business from Hi-Temp Coatings Technology.

AzkoNobel, for its part, announced just last month it was acquiring BASF's industrial coatings business.

Still, the real hope for Sherwin-Williams purchase seems to be in the broader global footprint it will be afforded, which suggests the paint maker may believe opportunities for further growth in the U.S. are limited. The National Association of Realtors just reported existing home sales tumbled 7.1% in February to an annual rate of 5.08 million units, the lowest level since November.

That doesn't mean the paint company can't succeed. During the last economy downturn, it proved resilient as renovating a remodeling a home proved just as popular rather than buying new.

And international growth may not be easy to come by anyway. China's economy is slowing, despite the regime's indication it was willing to keep the spending spigots open to maintain lofty growth goals. And though Australia did see 3% growth last year, with an economy dependent on mining, which is now in retreat, that may not last much longer.

Ultimately, the antitrust hurdles should be low enough for Sherwin-Williams to get over so that it's able to attain the global aspirations it's held for so long now. Whether that growth plan remains paint-by-numbers simple, however, is not so clear cut.