Mergers & acquisitions in the coatings industry.

The furious pace of merger and acquisition (M & A) activity in the chemical industry over the past two years has extended throughout all sectors including paints and coatings. Both private equity firms and strategic players have made acquisitions along the value chain from upstream commodity

The rebound in the economy has enabled companies that suffered during the recent downturn to restructure and reorganize and divest themselves of non-core businesses. Those organizations that weathered the difficult times well have bolstered their operations with smaller, strategic bolt-on acquisitions. Private equity firms have acquired larger downstream businesses that have been on the selling block. In the coatings industry, 3-5% of firms are typically involved in M & A activity, according to Stephen Einhorn, president of Einhorn Associates, a mergers and acquisitions firm specializing in coatings. "Activity has been pretty steady over the last year or so and should continue to be so in 2005," he says.

In 2004, increasing raw material prices have been a major issue for paint and coatings companies. The profitability of many firms has been impacted as these companies have struggled unsuccessfully to pass on price increases to their customers, according to Mr. Einhorn. "A number of paint manufacturers have not been able to raise prices despite the dramatic increases in raw material and energy costs. As a result, their margins are being squeezed. Profitability has also declined for some of those companies that have managed to increase sales. Knowledgeable buyers in the industry understand that this situation is probably temporary because formulated chemical manufacturers, including paint and coatings companies, have been remarkably consistent in regaining their margins for the long run," he explains. Mr. Einhorn expects that in 2005 pricing will still remain an issue, despite the fact that the cost pressures associated with high oil prices should be subsiding by then.

According to Mr. Einhorn, strategic, long-term buyers are more interested in the sales growth of a target company, while short-term financial buyers tend to focus on earnings and profitability. Strategic buyers tend to be other chemical or coatings firms looking to enhance their core businesses. The more successful private equity firms (financial buyers) tend to require more due diligence and seek more unique technologies and market niches. Specialty chemicals are more knowledge- and technology-intensive. "Buyers familiar with the particular market sector will be interested in making acquisitions of this type," says Michael D. Brown of The ChemQuest Group, Inc., a management consulting firm located in Cincinnati, OH. Private equity (PE) firms, on the other hand, invest with short-term gain in mind and are interested in more upstream commodity players. "These companies are often capital intensive with simpler chemistry, and PE firms can improve the cost structure in order to get a return on their investment in a much shorter period of time," notes Todd Muhleman, financial analyst with The ChemQuest Group.

Much of the recent M & A activity has taken place in Europe. Deutsche Bank reported in December 2003 ("Chemical/Specialty M & A Still Price Sensitive") that there is a valuations gap between European and U.S. specialty companies, with U.S. companies having much higher valuations than their European counterparts. Private equity firms have found European companies to have attractive valuations, while U.S. companies have been left to strategic buyers looking to bolster their market positions with smaller, bolt-on acquisitions.

According to the report, "Private Equity in Chemicals," that was commissioned by the Chemical Industry Association (CIA) and prepared by Cogency Chemical Consultants Ltd., in January 2004, private equity investors are increasing their participation in M & A activity in the chemical industry. PE investors could account for as much as 30% of global transacted value, and an even higher amount (up to 40%) in Europe. The chemical industry is viewed as being more complex than other sectors in which private equity firms participate. However, there is continued interest placed by private equity firms in the chemical industry. This interest is attributed to the fact that the cyclicality and volatility of chemicals markets lead corporate managements to "undertake regular reassessment and rebuilding of the business model, leading to fragmentation, repositioning, and consolidation of industry segments."

The CIA study also found that equity firms believe that their increasing participation in the chemical industry will "drive a more entrepreneurial culture, create sustainable value for investors, improve cash management, financial discipline and management quality, and impose better corporate governance." Mr. Brown notes that PE firms can also have a positive impact on companies they do not acquire. "The threat of a takeover can bring fiscal discipline to companies as well," he says.

Five value creation strategies were identified in the CIA report: organic growth, market consolidation, buy and build, focus and simplify, and operating cost leadership. PE firms generally hold on to an acquisition for one to three years and then sell it for a profit, according to Mr. Muhleman. "In this short time frame, the majority of value is created through improving cost structure. There isn't enough time to invest and deliver on new product development and introduction," he states.

PE firms generally exit the business by selling off to strategic buyers. Stock market conditions have not been favorable for initial public offerings. Secondary buyouts, according to the CIA report, are increasing though, as financial pressures on trade buyers have increased. Some large acquisitions must be broken apart and sold off in pieces in order to meet debt repayment schedules and ensure that the remaining businesses continue to improve in value. "Economic conditions, the financial health of trade buyers, stock market sentiment, and the quality of businesses for sale all influence the mix of options available to PE houses at any given time," according to the report.

It is also important to note that not all M & A activity results in industry consolidation. "M & A is not equivalent to consolidation," stresses Mr. Muhleman. "When evaluating the level of consolidation in a market sector, the type of transactions must be carefully considered," he adds. Sometimes companies swap business units, which does not reduce the number of players in the market. Private equity firms sometimes acquire subsidiaries, turn them around, and then sell them off to a strategic buyer, which also does not result in consolidation. Additionally, if a PE firm breaks a company into smaller business units, the opposite of consolidation occurs--with the number of players actually increasing.

The ultimate question, of course, is what impact the recent M & A activity in the chemical industry--both upstream and downstream--will have on the coatings sector. "The coatings industry is the number one consumer of specialty chemicals," says Mr. Brown. "Consolidation in the specialty chemicals industry will therefore have significant impact on the coatings sector over the next several years." Raw material suppliers may gain pricing leverage, which will place additional cost pressures on more downstream players in the coatings market such as resin, pigment, and additive manufacturers, as well as paint formulators themselves.

There has been a significant level of upstream activity, with a few prominent private equity firms making major investments in the chemicals industry. Blackstone's purchase of Celanese; Apollo Management's acquisitions of Shell's resins business, some of the Eastman CASPI (resins) business, and most recently Borden Chemicals; and KKR's Rockwood Specialties purchase of many of the Dynamit Nobel operations and Johnson Matthey's pigments business are just a few.

Apollo Management significantly increased its position in resins for coatings when it acquired Eastman's acrylate ester monomers, composites (unsaturated polyester resins), inks and graphic arts raw materials, liquid resins, powder resins, and textile chemicals businesses. Observers are waiting to see whether or not Apollo will combine this new company with its Resolution Performance Products business (previously the resins business of Shell Chemicals). According to Michael Gregus, director of The ChemQuest Group, a combined entity would have annual sales of about $1.6 billion and be well positioned in most resin technologies. "The question would then be whether or not any strategic buyer would be in a position to afford such a large acquisition," notes Mr. Brown.

Some recent strategic maneuvering by companies has also been important to the paint and coatings industry. "Several dynamics are at work in the coatings industry, many of which are leading to the recent flurry of merger and acquisition activity," says Jim Stephanadis, global business

director, Resins & Polymers, Noveon Performance Coatings. "For example, producers of paints and coatings are consolidating to capture market share, access complementary or new technology, improve channels-to-market, and grow in new geographic regions." One result is that companies are becoming larger and more globally focused, enabling them to demand more of their suppliers to hold costs steady or even reduce them. Mr. Stephanadis adds that, at the same time, companies are also rationalizing technical staff and are demanding more services from their suppliers. "As a result of both these trends, suppliers to the coatings industry have reduced capital available to reinvest in their businesses. Thus, they often have to make difficult choices and establish priorities in terms of resource allocation, technology leveraging, new product developments, and/or investing in new capacity or even performing needed maintenance."

Lubrizol has also been a key strategic buyer in the resins and additives segments. The company expanded its fledging coating additives business with its 1993 acquisition of George M. Langer & Co. establishing a European base of operations for technologies for paint, coatings, and inks. In 1998, three acquisitions followed: the Latin American coating additives business of BetzDearborn Brasil Ltda.; Carroll Scientific, Inc.; and selected assets of Sumitomo Polymers North America in Pennsylvania. Within the last two years it has significantly expanded its position with the acquisitions of Dock Resins, Avecia's coatings and inks additives hyperdispersant business, and Noveon Inc.

"When Lubrizol management decided it wanted to diversify the company, they started investigating how to transfer existing technology into different industries and end-use markets. The company realized, however, that they could not rely on organic growth alone; they needed to partially acquire their way to success," says Mr. Stephanadis. He adds that the companies or portions of business that Lubrizol has purchased over the better part of 10 years have allowed it to expand geographically, add new product platforms to its portfolio, build on its technical expertise, and build its core competencies. "This M & A activity, coupled with our innovative organic technological developments, makes The Lubrizol Corporation--and especially its Noveon division--a leading supplier of additives and specialty resins for the coatings industry," he continues.

Consolidation of upstream paint and coatings players is expected to make the industry more profitable and, in general, healthier. Whether or not recent M & A activity has resulted in increasing pricing power for coatings players is hard to tell. "The energy issues facing all of the chemical industry have overshadowed any impact that recent mergers and acquisitions might be having at this point in time," explains Mr. Brown. "I do believe, though, that in the long term we will see some positive impact on pricing power," he continues.

The two largest transactions for coatings formulators in the last couple of years are Bain Capital's acquisition of SigmaKalon from TotalFinaElf and Berkshire Hathaway's purchase of Benjamin Moore. The Berkshire Hathaway acquisition is an exception to the general behavior of private investment groups. "Benjamin Moore is one of the top coatings businesses in the world in terms of management and profitability," says Mr. Brown. "The value in Benjamin Moore is not the technology, but the excellent brand name and extremely loyal distribution channel," he continues. "Warren Buffett is known for finding value where others don't, and this acquisition is a perfect example."

Most M & A activity within the coatings industry has been on a much smaller scale, with national players acquiring smaller regionals. The latest announcements concern the acquisition of two U.S. regional players: Professional Paint (PPI) by Mexican national Comex and Duron by Sherwin-Williams. "We can only speculate about the intentions of Comex, but it makes sense that they are looking to enter the U.S. market at a low cost position," says Mr. Brown. "It is also curious to consider why Sherwin-Williams didn't snap up PPI, since the company has indicated that it remains interested in further regional acquisitions," he adds. Without having any details on how the deal took place, it is difficult to say whether or not Sherwin Williams had any opportunity to be a player. In any event, with the backing of Comex, PPI will be a formidable competitor for Sherwin-Williams in the Western and Intermountain regions of the U.S.

The Duron acquisition increases Sherwin-Williams' market share to 38% and gives the company close to 3000 stores, which is nearly double that of competitor Home Depot. It also enhances the company's position in the contractor market in the eastern U.S. Sherwin-Williams also recently completed its acquisition of Paint Sundry Brands of Philadelphia.

One area that has not experienced any noticeable consolidation but that needs to see significant restructuring is the powder coatings market. "Overcapacity has been an issue for this sector for some time, and we would expect to see a lot of consolidation," says Mr. Brown. However, the players in this market are not seen as being profitable enough to be attractive as takeover targets. "Most likely a private equity firm will identify a potential for improving value and take the lead in starting acquisition activity," adds Mr. Muhleman. "In this particular sector, there are a number of family-owned businesses that do not appear profitable enough to warrant maintaining them, but they do provide enough income to support the livelihoods of their owners. It will take some time for these businesses to either fold or be acquired by larger players," he also notes.

As we move closer to 2005, the level of M & A activity remains relatively high. Will it continue through next year? "The chemical industry tends to be the leading indicator for economic expansion in general," says Mr. Brown. "It tends to come up before the rest of economy, and some analysts believe we are near the peak of this cycle," he continues. "Therefore we may expect to see a decline in acquisition activity by private equity firms and an increase on the selling side, as long as strategic buyers remain financially capable of bolstering their positions through purchase of these businesses."

2003-2004 Mergers & Acquisitions Activity

Year         Acquirer                               Country

Commodities
Jan  2004    Koch Industries                        USA
Apr  2004    Blackstone (private equity)            USA
     2004    Chemial (owned by private equity 3i)   UK

Specialties
Jan  2003    UCB                                    NET
Jul  2003    Huntsman                               USA
Aug  2003    Halox (div. of Hammond Group)          USA
Nov  2003    Texas Pacific Group                    USA
Dec  2003    Sherwin-Williams                       USA
Jan  2004    Lubrizol                               USA
Feb  2004    JM Huber                               USA
Mar  2004    International Specialty Products       USA
Mar  2004    Arch Chemicals                         USA
Apr  2004    Azelis                                 LUX
Apr  2004    Elementis                              UK
Apr  2004    Kohlberg, Kravis, Roberts              USA
Apr  2004    Lubrizol                               USA
Jul  2004    Apollo Management                      USA
Jul  2004    Apollo Management                      USA
Jul  2004    DSM Coating Resins                     NET
Aug  2004    Rockwood Pigments (KKR)                USA

Formulators
Jan  2003    Chemcraft International                CAN
Jan  2003    ICI Paints' North American Division    USA
Feb  2003    Bain Capital                           USA
Mar  2003    Magni Group                            USA
Mar  2003    Spencer Coatings                       UK
Apr  2003    Akzo Nobel                             NET
Apr  2003    General Paint                          CAN
Apr  2003    RPM                                    USA
May  2003    Altana                                 GER
May  2003    Lafarge Peintures (Materis group)      FRA
Jun  2003    Sto AG                                 GER
Sep  2003    Akzo Nobel                             NET
Sep  2003    Hillebrand Coating Technologies        GER
Sep  2003    ITW-Devcon                             USA
Aug  2003    Riverside Investment Fund              USA
Jan  2004    Chemcraft International                USA
Jan  2004    Professional Paint (PPI)               USA
Jan  2004    Valspar                                USA
Mar  2004    H.B. Fuller                            USA
Mar  2004    Sika                                   SWI
Apr  2004    CWS Powder Coatings                    GER
Apr  2004    Fenzi Group                            ITA
Apr  2004    Lafarge Pintures                       FRA
May  2004    Sherwin-Williams                       USA
Jun  2004    Cloverdale                             CAN
Jun  2004    FLH group                              SWI
Jul  2004    Akzo Nobel                             NET
Aug  2004    Comex                                  MEX
Aug  2004    Valspar                                USA
Aug  2004    Salchi                                 ITA

Year         Acquiree                            Country  Value

Commodities
Jan  2004    Dupont's Invista textiles and
             intermediates                       USA            $4.4 BN
Apr  2004    Celanese                            GER            $3.7 BN
     2004    AP Chemicals from Clariant          UK

Specialties
Jan  2003    Air Products' graphic arts
             business                            USA
Jul  2003    Vantico/Matlin-Patterson            Global
Aug  2003    Irgacor organic corrosion
             inhibitor business from Ciba        SWI
Nov  2003    Kraton Polymers from Ripplewood     Global
Dec  2003    Accurate Dispersions from Eastman   USA
Jan  2004    Avecia's additives business         UK
Feb  2004    CP Kelco ApS from Hercules          USA
Mar  2004    Biochema Schwaben                   GER
Mar  2004    Avecia's biocides business          UK           $215 MM
Apr  2004    Sibeco                              BEL
Apr  2004    Sasol Servo                         NET      [euro]48.5 MM
Apr  2004    Dynamit Nobel                       GER       [euro]2.5 BN
Apr  2004    Noveon                              USA            $1.84 BN
Jul  2004    Eastman's CASPI unit                USA          $215 MM
Jul  2004    Borden Chemical from KKR            USA            $1.2 BN
Jul  2004    Huttenes-Albertus Lackrohsoffe
             coatings-resins busin               GER
Aug  2004    Johnson Matthey's pigments and
             dispersions business                USA           $50 MM

Formulators
Jan  2003    Antoni Coatings                     CAN
Jan  2003    Hancock architectural paint stores  USA
Feb  2003    SigmaKalon from TotalFinaElf        FRA            $1 BN
Mar  2003    Lackfabrik Dr Schmid Nachf GmbH     GER
Mar  2003    Pearl Paints                        UK
Apr  2003    Omni AB's bus painting facilities
             in Sweden                           SWE
Apr  2003    Ideal Paints                        CAN
Apr  2003    Koch Waterproofing Solutions        USA
May  2003    Schenectady's global electro-
             insulation business                 USA
May  2003    Alp Pinturas                        SPA
Jun  2003    Siocof AG                           FRA
Sep  2003    Techni-Coat International NV        BEL
Sep  2003    Tirbo Tech AG                       SWI
Sep  2003    Futura Coatings                     USA
Aug  2003    HOB Prima of Brasy                  CZE
Jan  2004    Paramount Paint & Lacquer from
             Surface Protection Industries       USA
Jan  2004    Classic Paint                       USA
Jan  2004    De Beer Lakfabrieken BV             NET
Mar  2004    Probos SA's adhesives and resins
             business                            POR
Mar  2004    Akzo Nobel's polyurethane
             adhesives                           NET
Apr  2004    Dorken's powder coating business    GER
Apr  2004    Akzo Nobel's mirror coatings        BEL
Apr  2004    R M Distribution                    FRA
May  2004    Duron                               USA          $253 MM
Jun  2004    Rodda Paint                         USA
Jun  2004    Franken Coatings                    GER
Jul  2004    Altana Group's coil coatings
             business (Rhenacoat)                FRA
Aug  2004    Professional Paint (PPI)            USA
Aug  2004    Associated Chemists (forestry
             products line and assests)          USA
Aug  2004    Altana Group's coil coatings j.v.
             business                            ITA      [euro]27 MM
             (Salchi Rhenacoat)

Year         Sales

Commodities
Jan  2004                              Includes sizeable coatings
                                       supplies business: amines for
                                       polyamide powder coatings;
                                       waterborne PU systems and epoxy
                                       coatings; anti-fouling additives
                                       for marine coatings; curing
                                       agents and other additives.
Apr  2004
     2004    [pounds sterling]15 MM    Clariant's esters business.

Specialties
Jan  2003                    $17 MM    Liquid resins, including
                                       waterborne emulsion and solid
                                       acrylics for graphic arts.
                                       Includes production facility in
                                       Langley, South Carolina with 35
                                       employees.
Jul  2003                              Restructure that gives Hunstman
                                       full operational control of the
                                       business. Renamed Huntsman
                                       Advanced Materials.
Aug  2003                              Includes coating patents,
                                       manufacturing technology, and
                                       R & D.
Nov  2003                   $770 MM    Private equity exit from Kraton
                                       which was bought from Shell 2001.
Dec  2003                    $45 MM    Colorants product lines and
                                       equipment. Includes 140
                                       employees.
Jan  2004                    $50 MM    Includes pigment dispersants such
                                       as Solsperse, Solplus and Solthix
                                       for coatings and inks.
Feb  2004                              Leading producer of xanthan gum,
                                       pectin, and carrageenan. Rheology
                                       modifiers.
Mar  2004                              Biocides.
Mar  2004
Apr  2004               [euro]28 MM    Distribution of additives, flame
                                       retardants, and general
                                       chemicals.
Apr  2004              [euro]108 MM    Additives for coatings and
                                       specialty surfactants, and paper
                                       chemicals.
Apr  2004                     $1.6 BN  Includes Chemetall and Sachtleben
                                       to be combined with KKR's
                                       Rockwood pigments.
Apr  2004                     $1.2 BN
Jul  2004                   $600 MM    CASPI (coatings, adhesives,
                                       specialty polymers, and inks).
                                       Majority of these businesses were
                                       acquired during Eastman's $500
                                       million purchase of Lawter
                                       International in 1999, and its
                                       $355 million acquisition of
                                       McWhorter in 2000.
Jul  2004                     $1.4 BN
Jul  2004               [euro]15 MM    Resins.
Aug  2004

Formulators
Jan  2003                              Wood coatings.
Jan  2003                              Paint stores in Boston area, from
                                       Sico subsidiary Hancock.
Feb  2003                [euro]1.7BN   Does not include the U.S.
                                       business (Sigma Coatings) which
                                       is involved in litigation with a
                                       customer (sales of [euro]35MM).
Mar  2003                              Schmid paint company employs 20
                                       people and concentrates on
                                       industrial paints and exports.
                                       Products widely used in auto
                                       industry.
Mar  2003
Apr  2003
Apr  2003                              General Paint is a subsidiary of
                                       Professional Paints of the U.S.
                                       General had 69 locations in
                                       western Canada. Ideal is an
                                       architectural paint firm in
                                       Ontario.
Apr  2003                    $30 MM    Operate as a stand-alone business
                                       under RPM's Tremco unit. Provider
                                       of waterproofing solutions to new
                                       residential construction market.
May  2003                    $90 MM    Wire coatings and insulation of
                                       wires and impregnation resins for
                                       the insulation of wires and
                                       impregnation resins.
May  2003               [euro]23 MM    Spanish decorative paint maker.
Jun  2003               [euro]15 MM    Facade paints and elastic
                                       coatings.
Sep  2003               [euro]10 MM    Plastic coatings for consumer
                                       electronics, cosmetic packaging,
                                       sports and leisure goods.
Sep  2003                              Low-friction coatings for dry
                                       film lubrication, corrosion
                                       protection. Also functional
                                       coatings with noise reduction and
                                       heat conduction properties into
                                       auto and machine industries.
Sep  2003                              Polyurethane and polyurea
                                       coatings, elastomers and
                                       structural resins and other
                                       specialty coatings.
Aug  2003                              35,000 tons of decorative paint
                                       capacity.
Jan  2004                              Wood finish paints and lacquers
                                       based in Los Angeles serving
                                       southern California and Mexico.
Jan  2004                              Non-mfg assets and four retail
                                       stores: Professional Paint owns a
                                       number of regional paint
                                       companies; Hanly Paint, Parker
                                       Paint, Kwal Paint, Sophie Morris
                                       Paint, Stellar Kwal Paint
                                       (formally Jones-Blair), Duckback
                                       Products, General Paint, Ideal
                                       Paint.
Jan  2004               [euro]39 MM    Manufacturer and distributor of
                                       automotive refinish coatings.
Mar  2004                    $30 MM    Water-based, hot-melt, reactive
                                       adhesives for assembly,
                                       woodworking, footwear and
                                       converting. Emulsions for
                                       coatings as well.
Mar  2004               [euro]17 MM    Leading position in the sandwich
                                       panel bonding systems for truck
                                       trailors, building facades, and
                                       wind turbine blades.
Apr  2004
Apr  2004                [euro]7 MM    Akzo is looking to divest other
                                       general industrial coatings.
Apr  2004                    $18 MM    French decorative paint company.
                                       Larfarge Pintures is part of
                                       building materials group Materis.
May  2004                   $350 MM    Regional paint firm with 253
                                       company stores.
Jun  2004                              Merger of two western regional
                                       paint companies.
Jun  2004                              Industial Paint.
Jul  2004               [euro]11.6 MM  Includes coil coatings facility
                                       at Montataire.
Aug  2004                              Western U.S. regional paint
                                       company.
Aug  2004                              Sealants, surface primers, paints
                             $28 MM    and stains, inks, and specialty
                                       chemicals for makers of oriented
                                       strand board and other wood
                                       products.
Aug  2004                              Selling the 51% stake in joint
                                       venture to its partner.

Data supplied by ChemQuest.

by Cynthia Challener

JCT COATINGSTECH, Contributing Writer