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Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

What was the American chemicals giant smoking? It's hard to think of a worse time for a foreigner to try buying a big Dutch company against its will.

But PPG Industries Inc. is undeterred. Forget next week's elections, or Kraft Heinz Co.'s failed effort to buy Unilever last month. PPG wants to acquire Akzo Nobel, the maker of Dulux paints.

The target rejected the approach in no uncertain terms on Thursday -- but Akzo CEO Ton Buchner's response, a promised break-up, looks forced and leaves the door open to a sweeter offer.

Akzo has been struggling. While its shares have traded in line with chemical peers, that's deceptive. Relative to earnings, they trade at a discount of about 10 percent.

The problem is Akzo is comprised of two businesses -- coatings and specialty chemicals -- that would benefit from greater scale and that lack obvious synergies together. The company also has a big pension deficit, a legacy of its acquisition of Britain's Imperial Chemical Industries Plc in 2008.

Revenue Squeeze
Akzo Nobel's annual sales growth has been shrinking in recent years
Source: Bloomberg

A deal would be an obvious remedy. The enlarged company would become a big player in a fragmented market and costs could be stripped out. A stronger business would, in turn, be better able to support the pension liability. Most analysts think PPG and Akzo are a good fit.

PPG's approach is worth about 21 billion euros, 13.6 billion euros of that in cash and the rest in PPG stock. That's a 5 billion-euro, or 30 percent, premium to Akzo's market value as of Wednesday's close. Cost savings could be 570 million euros annually, according to Bernstein analysts. Taxed and capitalized, they would at least cover the offer premium.

The cash component would push PPG's net debt to 3.7 times the combined company's Ebitda. That's high, but not unprecedented: it's less than where German rival Bayer AG's leverage will be if it completes its acquisition of Monsanto Co.

Can Akzo get its share price to the 83 euros offered by PPG on its own?

In theory, yes. PPG's approach has already prompted Buchner, who has led Akzo for nearly five years, to announce a possible separation of the specialty chemicals business. It's a move analysts have advocated for some time, but it's embarrassing for Akzo that it's taken PPG to trigger it.

Treading Water
Before Akzo rejected the bid, its shares had fallen over the past two years
Source: Bloomberg

Deutsche Bank analysts reckon Akzo can push the stock even higher than the bid value by selling the chemicals unit and using the proceeds to cut debt and expand in coatings. A subsequent re-rating would push the stock to more than 100 euros, they argue.

For Akzo shareholders, a combination with PPG could bring forward the benefits to today rather than force them to wait for Buchner's self-help program to work. The shares traded at about 74 euros on Thursday, below PPG's putative offer price and miles away from Deutsche Bank's sunlit uplands, indicating investors aren't confident of either.

Given Akzo's lowly valuation and the scope for cost savings, PPG could afford more. The U.S. group could address Akzo's concerns about leverage by putting more stock in the mix. Politics are on Akzo's side -- but only for now.

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

  1. Based on 2016 numbers and excluding the pension.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net