PPG Industries Inc.'s 21 billion euro ($22.3 billion) proposed takeover of Akzo Nobel NV is way meaner than its 31 percent premium suggests. With the U.S. paints group expected to make a higher offer, investors in Akzo should be wary of being seduced by numbers that look big only in comparison to the Dutch target's lowly market valuation.
The approach by PPG CEO Michael McGarry to Akzo counterpart Ton Buchner was carefully calibrated. An offer at less than 30 percent would have looked mean -- it's the commonly accepted top-up for takeovers. But while the premium looks fair at first glance, the proposal is miserly in absolute terms.
The price ascribes an enterprise value of 22.7 billion euros for Akzo. That's just 10.3 times this year's expected Ebitda, a 6 percent discount to where the sector is trading.
Worse, the proposal looks cheap besides recent big chemical deals. The Sherwin-Williams Company agreed to pay 15 times forward Ebitda for the Valspar Corporation, while BASF SE paid the same for France's Chemetall SA last year, as did Solvay SA in its purchase of Cytec in 2015.
An offer for Akzo in line with these deals would imply a bid price of 124 euros a share: a 90 percent premium.
Surely that's completely crazy? You certainly couldn't imagine PPG shareholders swallowing it: analysts are talking about a takeout price below 100 euros. But the 90 percent premium looks outsized largely because the market was ascribing Akzo a cheap enterprise value-to-Ebitda multiple of 8 times before PPG's interest surfaced.
Of course, Akzo has been cheap for a reason. The group has struggled with organic growth, and investors worry that its coatings units lack scale. Above all, it is dogged by a conglomerate discount.
But Akzo shareholders can sell the company only once. As with any takeover, they will want to focus on the future value they might surrender by exiting at this point in the industrial cycle. It's plausible that Akzo revenue will pick up as the world economy turns.
The conglomerate discount is easily remedied by carving up the company and becoming more focused, a process now underway. Deutsche Bank analysts reckon a re-rating could earn Akzo a stock price of 112 euros.
The Dutch target is now on the ropes and under intense pressure to show a credible path to getting its shares above the PPG offer. Some investors want it to engage. But its directors shouldn't be embarrassed to swat away a premium that would usually make other boards roll over.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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