Deals

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.

Akzo Nobel NV has come up with a new strategy and targets that help justify its decision to reject a 22.4 billion-euro ($24 billion) takeover proposal from PPG Industries Inc. Yet these may not be enough to preserve the Dutch paints group's independence if its U.S. suitor returns with a new offer.

Lengthy anti-trust reviews mean any PPG deal would take a year or perhaps more to complete. The path outlined by Akzo CEO Ton Buechner suggests he could deliver comparable value over the coming 12 months -- if everything goes right.

The cornerstone of the plan is a carve-out of Akzo's specialty chemicals business via a sale or listing. Analysts value this today at between 8 and 12 billion euros, the company says. Buechner thinks the unit can lift operating margins from around 13 percent to a whopping 16 percent, come 2020. If the business can show early progress to that goal, the more bullish valuations might be achievable.

At the same time, investors will get a 1 billion euro special dividend, plus a raised ordinary dividend. That constrains Akzo management from pursuing value-destructive M&A. All good.

These actions will leave Akzo a smaller, more-leveraged and focused paints and coatings company. Akzo says this rump could perform better too -- with operating margins to rise to 15 percent over the next three years. If these businesses enjoyed the target margin on their sales forecast for this year, their operating profit would be the same as what Akzo is expected to deliver as a whole in 2017. That shows how big the task is.

Big Leap
Akzo must deliver on its ambitious new goals to preserve its independence
Source: Company statement

It sounds overambitious. Yet it really does seem that Akzo envisages that the paint and coatings rump will achieve a performance boost that compensates for the loss of the specialty chemicals contribution. Akzo says the unit will pay a 1.65 euro per share dividend in 2018. That's what the entire group announced for 2016. It's as if the spinoff gives Akzo shareholders a whole new asset, on top of owning something whose value is unchanged from the original company's 16 billion-euro valuation.

So that's the pitch. Stick with current management and at some point, you'll own an Akzo share paying the same dividends as previously, plus you will have either a new share in a specialty chemicals company or receive a sack of money if that gets sold. This could be worth a little more than PPG's offer and potentially includes a large amount of cash too -- albeit not as much as in PPG's proposal.

The question is, when will this value really materialize? Buechner has a track record of meeting his targets, but these are for 2020. It still demands a leap of faith that this plan can be delivered as it will involve lifting volumes as well as cutting costs.

Is That It?
Akzo shares have failed to receive a big lift from the company's defence strategy
Source: Bloomberg
Intraday times are displayed in ET.

The dividend commitment gives some confidence that management isn't just making it up, although Akzo could have buttressed confidence further by tying Buechner's pay to delivery.

The shares barely moved on the strategy update, trading at 78.85 euros against a PPG offer pitched at 88.72 euros. Bernstein analysts say the new strategy could raise the company's value to 85 to 93 euros a share.

The snag for Akzo is that if it contains all this hidden value, PPG can comfortably justify a raised offer -- and without a stronger share price, Akzo may now struggle to see that off.

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

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

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net