Sherwin-Williams (SHW) announced on Sunday an agreement to acquire its smaller paints and coatings rival Valspar (VAL) for $113 per share in cash. Weighing in on the news, several Wall Street analysts argued today that, beyond generating as much as $4.00 in additional earnings per share for the new company, the merger could lift the entire sector.
POSITIVE FOR COATINGS SPACE: Baird analyst Ghansham Panjabi argued Monday that Sherwin-Williams’ acquisition of Valspar is financially and strategically accretive to the company, with his conservative calculations modelling $3-plus in EPS accretion by year two. Valspar’s packaging coatings business is a “crown jewel” within the space, and the combination also increases Sherwin-Williams’ exposure to U.S. do-it-yourself painters, international territories and industrial applications, catapulting the company into a position of global leadership. Moreover, Panjabi said the combination is positive for the entire coatings group, particularly mid-cap names in his coverage space such as Axalta (AXTA) and RPM International (RPM).
IMPROVED PRICE DYNAMICS: SunTrust analyst James Sheehan argued that the Valspar merger news is also positive for PPG Industries (PPG), as the deal could improve overall competitive dynamics in the coatings industry. Sheehan explained that consolidation may improve pricing in the sector, particularly for architectural paints at big box retailers, which have seen increasingly competitive pricing over the past 12-18 months. Additionally, Sherwin and Valspar will likely be met with “rigorous” antitrust scrutiny, possibly giving PPG an opportunity to pick up asset divestitures. The company’s large research and development budget allows it unique capabilities to generate synergies from those potential acquisitions, the analyst noted. Given those potentials, as well as low oil driving reduced materials costs, Sheehan raised his estimate for PPG’s unlevered free cash flow to $2.1B from $1.8B and boosted his price target to $125 from $114, adding that he sees “substantial opportunity” for more consolidation and expects PPG to be particularly active in general industrial coatings.
