Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Are the days of striking a deal and leaving the rest to regulators over? 

Painting the Lines
Sherwin-Williams had been outperforming Valspar on a normalized basis until news of the deal.
Source: Bloomberg

Maybe so, if Sherwin-Williams's latest move is any indication. The coatings company made sure it has the ability pay less than the headline $9.3 billion figure (or $113 a share) to acquire rival Valspar if it is forced to shed assets to appease antitrust authorities, thanks to these carefully negotiated points in the merger agreement: 

"...in what both companies believe to be the unlikely event that divestitures are required of businesses totaling more than $650 million of Valspar’s 2015 revenues, the transaction price would be adjusted to $105 in cash per Valspar share.  Sherwin-Williams would have the right to terminate the transaction in the event that required divestitures exceed $1.5 billion in 2015 revenues."

Both Sherwin-Williams and Valspar said repeatedly on an M&A call with analysts Monday that no divestitures are expected and that the terms are meant to "create certainty" around the deal. But their very existence shows it is possible to hedge against unpredictable antitrust remedies and that such concerns are front of mind. It also has investors wondering why precariously balanced merger candidates such as Halliburton and Baker Hughes didn't think to do the same. 

To be sure, Sherwin-Williams doesn't claim to have a long and storied track record of dealmaking , but the company took notes after its last sizable attempt flopped. In 2012, it agreed to buy Mexico's largest paint maker, Consorcio Comex SA, a deal that was blocked by antitrust regulators. To make matters worse, even though Sherwin-Williams ended up with a consolation prize in Consorcio Comex's modest U.S. and Canada operations, the coveted Mexican business was left for the taking. Larger rival PPG Industries wasted little time in pouncing, sewing up a deal of its own later in 2014. 

Plus, Sherwin-Williams was sued by Consorcio Comex's owners, who allege the Cleveland-based company didn't put forth its best efforts to get regulatory approvals in time. For its part, Sherwin-Williams was not willing to divest the Sherwin-Williams brand in Mexico "in perpetuity" nor be precluded from operating in the country after a lengthy blackout period, but only disclosed this stance many months after the deal had been agreed. 

Brushing Up Against Rivals
Sherwin-Williams and Valspar are poised to become the #1 player in the global paints and coatings industry (as measured by calendar year 2015 sales)
Source: Sherwin-Williams presentation (public filings and company estimates)

Divestiture limits -- such as the ones in the Valspar deal -- somewhat define "best efforts" and how far a buyer is willing to stretch before a deal becomes unfeasible.  But they also give antitrust authorities a target and the ability to demand more concessions than they may have otherwise. 

For now, Sherwin-Williams has done what it can, knowing there are no second chances. And it has opened a page of the M&A playbook that may soon become well-worn as dealmakers across the board ride the ongoing consolidation wave.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. In fact, the pending Valspar purchase is more than ten times the size of its largest completed deal to date: the 1996 acquisition of Thompson Minwax for $830 million. 

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net