The time has come for Akzo Nobel NV to talk to PPG Industries Inc. about a deal. The Dutch paints group was right to resist its U.S. suitor's first two proposals. But the latest, valuing Akzo's equity at 24 billion euros ($26 billion), is clearly a basis for discussion.
PPG says it's willing to buy Akzo for 15 billion euros in cash (adjusting its offer for the target's next dividend payment), plus PPG stock worth 9 billion euros based on the share price in Monday trading. At approximately 96 euros per share that's a 49 percent premium to Akzo's share price in March before PPG's interest emerged.
The premium is well above what would normally facilitate talks. So it should be. Including assumed debt, the pitch values Akzo at some 27 billion euros ($29 Billion) or 12 times this year's forecast Ebitda. Recent big paint deals have gone for about 15 times. Still, it's hard to be certain that Akzo's standalone strategy could get the stock above the offer level in the foreseeable future. Most analysts value Akzo at less on a standalone basis.
There's still plenty to negotiate. PPG has tried to address Akzo's broader stakeholder concerns. It says it will locate certain divisional headquarters in the Netherlands and pay a break fee that would compensate for business damage if the deal failed after a long regulatory review. That fee needs to be big. Moreover, PPG's promises on jobs amount to little more than obeying the law and respecting existing contracts. It's not clear whether this is much more or less fair to employees than Akzo's own cost-cutting plan.
Akzo's previous objection to the leverage PPG would absorb looks hard to sustain given the bidder remains confident of maintaining an investment-grade credit rating and Akzo itself is planning a substantial cash return. PPG's CEO Michael McGarry is threatening to go hostile if his new offer doesn't bring Akzo to the negotiating table.
Assuming Akzo can be comforted over its stakeholder concerns, could it extract a higher price from PPG for a recommendation? An offer at a clean 100 euros per share would imply an all-in purchase price of 28 billion euros. It's plausible that Akzo could contribute 2.6 billion euros to PPG's operating profit in 2020, taking analyst forecasts plus the bidder's current synergy estimates. After tax, that would suggest a return of 7 percent on the deal after three years. To get to Akzo's cost of capital, estimated by Raymond James at 7.6 percent, PPG would need to find more savings in talks -- or hope its investors tolerate a more distant payback. With PPG's stock rising, its shareholders aren't obviously scared about a deal at these levels.
Akzo's resistance to PPG has nudged the offer price more than might have been possible through engagement earlier. From here, talks might just eke out a bit more still.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
(A previous version of this story was updated to include PPG's comments about a hostile approach.)
To contact the author of this story:
Chris Hughes in London at firstname.lastname@example.org
To contact the editor responsible for this story:
James Boxell at email@example.com