Acquisitions, divestments and joint ventures in the coatings field during 1995.

Do hard times induce massive corporate sell-offs while good times foster heady acquisitions? Is the economic climate a catalyst or a deterrent to large-scale industrial regroupings? In fact, the economic weather vane can do either or both. Dr Helma Jotischky reports on the year's business dealings.

Acquisitions

and divestments are fed by two basic impulses: structural and speculative. The structural motive is associated with a fundamental corporate regrouping, usually in the wake of a glutted market or an economic recession. The outward signs are downsizing and divestment. The speculative element, in contrast, comes into play at the beginning of the economic cycle when markets seem buoyant and marketeers feel bold. This can result in takeover fever or merger mania, especially as failed companies from the last recession come cheap.

1995 saw a confluence of structural and speculative impulses: companies merging for the sake of industrial logic as much as for financial imperatives. The result was a bumper crop of transactions, valued at [pounds]41 billion in the UK[1] and at US$350 billion in the USA[2]. Across the Atlantic, where recovery had come earlier, the speculative motive came into full swing. Thus restructuring needs overlapped with the investment urge. The latter can be seen in the many joint ventures in the Pacific Rim. Overall, mergers and acquisitions rather than divestments were the year's hallmarks. Among them were many mega-deals. The clues to these transactions are found in the individual markets themselves.

Decorative Paints

Of all the markets the decorative paint sector underwent the most radical change on both sides of the Atlantic. The nuances of this restructuring, however, were distinctly different.

The decorative sector is the ultimate large-volume, low-value market. The key to this market is volume to control costs. It relies on economies of scale in raw material purchasing, production and distribution. Volume strengthens corporate purchasing power and lowers costs. Yet in a saturated, mature market, volume can become an embarrassment. Control over distribution outlets or, failing that, control over the competition, assumes key significance.

This invariably leads to takeovers, consolidation, concentration and closure of redundant facilities. This has been the path followed over the last 10 years in the UK. In the USA, where paint company owned stores are common, control of additional retail outlets is often the inspiration behind expansion.

In a year dominated by soaring raw material prices, the need to control costs [TABULAR DATA FOR TABLE 1 OMITTED] loomed large. Mergers offered one means to this. Four sets of multiple purchases managed to change the face of the decorative paint market in France, the UK and the USA. In Europe, they were the merger of Kalon with Total's paint interests into Euridep, followed by the sale of PPG's French decorative paint business to ICI. In the USA they were ICI's acquisition of the Grow Corp and Fuller-O'Brien on the one hand and the takeover by Sherwin-Williams of Pratt Lambert United and several smaller businesses on the other.

[TABULAR DATA FOR TABLE 2 OMITTED]

European changes

In the UK, concentration of the decorative market has been a continuous process for the last 10 years. Milestones included the integration of Leyland into Kalon; the union of Crown and Berger, later with Macpherson and the Akzo holdings under Akzo Nobel; the emergence of the Total nucleus with Johnstone's, Manders and Windeck. Each was accompanied by rationalisation measures.

Thus earlier acquisitions had reduced the main suppliers in the DIY paint market to two, Akzo Nobel and ICI. Kalon was the third force, straddling both the trade sector and the own-label DIY market in which Kalon was the leader. In 1992 Kalon had failed in its bid for Manders. Instead Manders eventually went to Total, joining Johnstone's Paint. Total had thus accumulated 15% of the decorative sector, extending to the trade, specialist retail and own-label markets.

Kalon meanwhile found success in France with the acquisition of Novodec in 1993. In 1995 the consolidation of the UK market, and its integration with that of France, were taken several steps forward. Linking Kalon and Total's paint interests, both in France and the UK, seemed like the logical next move. This merger was carried out through an exchange of shares, creating a new listed company with a [pounds]520 million turnover, Euridep, headed by Kalon's Managing Director but in which Total held the controlling interest[3]. Cost savings from this merger would be at least [pounds]10 million a year. Indeed, rationalisation has already set in with the closure of Johnstone's manufacturing facility in Manchester.

The ultimate effect, however, was the emergence of a new number two on the European decorative paint market, right behind Akzo Nobel. Against this background ICI's subsequent acquisition of PPG's French decorative paint business at Valenciennes is hardly surprising. The addition of this FF350 million business fitted in well with ICI's expansion strategy on the European Continent in decorative paint, while for PPG, the European building market constituted a non-core activity. Thanks to the acquisition, ICI's [TABULAR DATA FOR TABLE 3 OMITTED] erstwhile 4% share of the French decorative market swelled to 9%, giving the Company third place behind Total and Akzo Nobel[4].

United States

The growing concentration on the European decorative market had parallels in the USA. Here the market, emerging from the 1990-93 recession, had been growing: by 9.1% in volume in 1994, though only by 4.6% during the first nine months of 1995 (with growth in sales value at 7.8% and 2.2% respectively).

Raw material price rises, however, were a big headache, especially to medium-sized companies. The twin solutions to this problem were lower costs (through critical mass) and wider distribution channels. Judicious acquisitions could address both.

The chief protagonists in the 1995 American integration story were Sherwin-Williams and ICI. In May ICI bought the Grow Corporation; in June it followed it up with Fuller-O'Brien. Sherwin-Williams instead first acquired several smaller businesses, then crowned it in November with the purchase of Pratt & Lambert United.

ICI beat Sherwin-Williams narrowly in its bid for Grow. Sherwin Williams had offered ICI [pounds]320 million[5]. Grow was a US$500 million business with 2800 employees but gross margins at only 3.5% compared to ICI's 7%. Some 80% of its sales were derived from decorative paints, though Grow also had a serious foothold in the protective and marine coatings market. The purchase brought ICI's total American paint sales to US$1.5 billion. Here was an opportunity for expansion in a core sector, but also for rationalisation, cost-cutting and greater purchasing power.

San Francisco-based Fuller-O'Brien, a US$80 million paint company with 50 stores and an independent dealership network, [TABULAR DATA FOR TABLE 4 OMITTED] gave ICI greater access to the paint market in the West. This latest purchase thus raised ICI's American market share from 14% to 15% while expanding the geographical base in both production and distribution[6].

Accounts with mass outlets can be the next best thing to ownership of a string of company stores. The US$400 million purchase by Sherwin-Williams of Pratt & Lambert United did give America's largest paint company access to the own-label market of such mass retailers as Wal-Mart. The Wal-Mart account itself was the legacy of the merger of Pratt & Lambert with United Paints in 1994. In addition to the decorative paint business, Pratt & Lambert United brought a host of specialities to the marriage, including powder coatings, roof, radcure coatings and adhesives[7].

However, high interest rates and rising raw material prices had hit the company hard. Pratt & Lambert's net income fell markedly during the first nine months of 1995 and its operating profit of 5.3% contrasts sharply with the 12%-13% reached by Sherwin Williams. During the year Sherwin-Williams also bought speciality paintmakers Con-Lux, the White Lightning Co and FLP Paint, as can be seen in Table 3.

Markets on the Move... Coil Coatings

Several industrial markets were also on the move; other large volume markets remained largely quiescent. Automotive, can and powder coatings had undergone earlier transformations in the early 1990s. Coil coatings soon followed suit. Several earlier transnational joint ventures in the field - between Courtaulds and Nippon (1993), Boero and Herberts (1994) and Salchi and Rhenania (1994) - were followed in 1995 by an outright acquisition. By purchasing the German company Mehnert & Veeck, the Courtaulds Nippon Group managed to double its European coil coating sales in a market dominated by Becker, Sigma, PPG, Rhenania and Akzo Nobel. Coil coatings was one of the few sectors which had registered growth during 1994 and continued to grow in 1995. It is an eminently high-tech market in which the technology aspects are as important as costs. A further integration in this area is likely.

Automotive Refinishes

Much of the rationalisation in the automotive OEM market had occurred earlier, with notable market exits by Akzo Nobel and ICI. Akzo Nobel, however, retained its automotive stronghold in South America. This now formed the basis of a joint venture with PPG in Argentina and Brazil.

One development in the automotive OEM fields deserves special mention - the appearance of NP Automotive Coatings Europe on the UK scene. In its former guise the company Nippon Bee Chemical, known for its automotive plastics, was a joint venture between Nippon and Morton International. With the dissolution of this joint venture in 1995, Nippon decided to go it alone and supply automotive coatings to Japanese car manufacturers abroad.

The outstanding deal in automotive refinishes was Akzo Nobel's purchase of Deckel Lack AB from Alfort & Cronholm, thus strengthening its Scandinavian distribution network. In Mexico Akzo Nobel entered into a joint venture for distributing car refinishes with Commercial Mexicana de Pinturas. In South America PPG concluded an automotive refinishes distribution agreement with the Bunge Group. In the USA, PPG exchanged its mirror backing coatings for the automotive refinishes of Lilly Industries.

Industrial Wood Finishes

Industrial wood finishes represent one large-volume market which has been remarkably resistant to large-scale integration. It still largely remains the preserve of medium-sized companies. One exception was the UK joint venture between Becker Acroma and Kemira Coatings, forming a new company Becker Kemira at Kemira's Suffolk site. 'Pooling resources' offers one way of cutting costs. Overall this is a market which still awaits a massive injection of both technology and capital.

Specialist Industrial Coatings

Most of the transactions in the large volume high-tech markets were of a transnational nature. Specialised industrial paint production, however, is still organised on a small-scale national or regional basis; most transactions were purely national.

Opportunity buys usually abound in a post-recession economy as do specialised product lines discarded by the large players in their restructuring. In the UK for instance, Croda had emerged as an avid collector of such businesses. During 1995 both Marcel Guest and McLeod Russel picked up a number of such businesses, with the former buying Croda's pencil coating business and Corrofast Coatings Ltd while McLeod Russel acquired Glassguard Coatings and Corroless, as shown in Table 2.

Printing Inks

Today inks are becoming a global market; hence many of the transactions were of a transnational nature. Among the ink deals was the acquisition of German inkmaker Lindgens Druckfarben by Akzo Nobel. In contrast, Trimite's purchase of Shackell Edwards was an all-UK affair.

Speciality Chemicals for coatings

Structural changes in the chemicals industry have been proceeding apace for some years now. Many companies were still searching for their essential corporate core. Strategic alliances, demergers, business swaps and sell-offs were different approaches to greater profitability. Many speciality chemicals producers suffered from the same price pressures, originating in shortages of intermediates, as coatings manufacturers.

Restructuring in the dyestuffs sector took many forms. The demerger by Sandoz of Clariant, its new dyestuffs and industrial chemicals arm, was one radical solution. Formal joint ventures or strategic marketing alliances - a la BASF and Ciba - were another approach. Marketing and distribution alliances are increasingly coming to the fore.

In the polymer field there was a lively trade in such lines as silicates and polyesters. DSM Resins acquired unsaturated polyester lines from Huls, but sold off its ink and adhesives resin to International Paper of the USA and its polymer dispersion business to Hoechst.

EMS Chemie is selling its polyester powder coating resins to UCB, although it has bought the Primid crosslinker for polyester powder coatings from Rohm and Haas.

The silicone business was much in demand. Witco of the USA paid US$486 million for the silicone-based chemicals of OSi Specialities, while Rhone-Poulenc raised its stake in Vispak, a UK producer of silicones and acrylics, from 80% to 100%.

Most transactions consisted of individual business areas rather than whole companies. The sale of Hoechst subsidiary Riedel-de Haen to Allied Signal in Germany and of T&N's BIP Resins and Plastics in the UK are notable exceptions, as shown in Table 5.

Hunting with the Tigers

The glamour of the 'Tiger' economies of the Pacific Rim continues to exert its pull on Western investors. The numerous joint ventures in the area exemplify the speculative element in these transactions.

China is currently heading the league of the most desirable destinations for Western funds. Henkel has signed its tenth joint venture there; Bayer, too, has entered into several. Akzo Nobel concluded two during the year: with Beijing Red Lion Coatings (with whom it already has a powder coatings venture) in liquid coatings, and a second one in powder coatings resins with Hangzhou Paint Factory. ICI, too, has entered into its second Chinese paint venture in conjunction with Swire Pacific of Hong Kong. Two American paint companies have entered the Chinese market during the year: Valspar for manufacturing packaging coatings and Pratt & Lambert (prior to the takeover) for manufacturing general paints.

Even now, seemingly ever greener pastures are beckoning in Vietnam and Burmah. Akzo Nobel has bought a 75% stake in a Vietnamese paintmaker, while Singapore-based Berger International has concluded a marketing agreement with a Burmese trading company.

The Australasian paint industry has undergone considerable change during the year. The indigenous Australian company Wattyl is continuing to expand both in Australia, with the purchase of Granosite Coatings, and in New Zealand, with the acquisition of Taubmans (Courtaulds' decorative paint business) and Norfolk Paint. Croda Coatings, part of UK-based Croda International, was also adding to its holdings in Australia and New Zealand during the year.

Stirrings in ROW

In ROW - the 'rest of the world' - the Middle East stands out as a potential geographical hot spot. There has been a moderate expansion in Saudi Arabia. Sigma started its third paint factory there, Jotun took a 40% share in the Red Sea Paint Factory and Courtaulds increased its interest in International Paint from 10% to 50%, as Table 4 indicates.

Whatever stirrings there were in Eastern and Central Europe, for the coatings industry they remained largely stillborn. Privatisation proceeded but seems to make no significant impact on coatings yet. An interesting development was the new joint venture, Baltic Colour, between Tikkurila of Finland and Akzo Becker of Sweden, extending to their subsidiaries in Estonia and Latvia.

Historical perspective

This is the eleventh annual article on mergers, acquisitions and divestments in PPCJ. That very first piece in January 1986, which traced developments between 1980 and 1985, contained the blueprint for a changing and changed industry. Acquisitions were escalating and by the mid-1980s they had reached fever proportions. The first wave, in the aftermath of the second oil crisis and ensuing recession, was driven by restructuring needs; the second wave in the late 1980s was generously fuelled by the speculative urge.

The early 1980s were seminal years for the British paint industry. In 1980 there was only one foreign-owned paintmaker among the UK's top ten. By the close of the decade there were six or seven. These were also the years when the industry lost [TABULAR DATA FOR TABLE 5 OMITTED] many of its medium-sized companies such as Leyland, Blundell, Dufay and Goodlass Wall.

These were also the years of an increasingly outward-looking industry, with expansion in Europe, but especially in the USA. In 1986, ICI bought Glidden, America's third largest paintmaker, for no less than US$580 million (compared with US$350 million paid for Grow in 1995) and became number one in paint worldwide.

In that same year ICI bought Inmont in Germany (the nucleus for the later IDAC) and the powder coatings business of Knopp in Germany. Both the automotive and powder coatings business, including that of Glidden, have been disposed of during the last few years.

New stars have risen on the paint horizon. Since then Akzo has become Akzo Nobel, thus challenging ICI for prime position. Total Chimie has transformed the erstwhile ailing state-owned paint holdings into a company with a European presence. PPG, through judicious acquisitions, has become one of the top companies in Europe. Other companies, hardly heard of in the 1980s, are climbing the ladder of success. Rhenania in coatings is a case in point. Meanwhile Europe has turned its face to Asia Pacific in the anticipation of growth.

What Next?

Acquisitions and divestments, for whatever motive, will continue to transform the industry. They will continue to make it more specialised, polarised and international, but the organic growth at its base tends to act as a counterpoise, thus ensuring its abiding fragmentation and local character.

What really distinguishes the industry is the technology required by different sectors. Large volume, in-line industrial markets are also high-tech markets, driven by the production processes of end users, be they car or can makers. Of necessity these markets are global. Smaller volume markets, such as general industrial finishing, are not necessarily less high-tech, but the batch processes they and their end users employ exact a different set of requirements. Indeed, they tend to benefit from the flexibility of smaller units. It is this which will ensure the industry's continuing fragmented character, acquisitions notwithstanding.

Acquisitions themselves may contain the seedcorn of change. Today's acquisition strategy demands synergy with the existing business. Sometimes, however, an acquired company brings more than synergy by offering additional niche areas. This is true in the case of both Pratt & Lambert and Grow. These niches can lead to subsequent divestments or form the shoots of growth in different directions. It is worth watching the path chosen by Sherwin-Williams and ICI.

[TABULAR DATA FOR TABLE 6 OMITTED]

References

1. Financial Times, 29 December 1995, 15.

2. Ibid. 7 November 1995, 18.

3. Ibid, 8 March 1995, 32.

4. Europa Chemie, 17 July 1995 (20), 2.

5. Financial Times, 23 May 1995, 19.

6. Ibid, 4 July 1995, 23.

7. Chem Week, 15 November 1995, 157 (19),9.