Valspar Votes on Sale to Sherwin-Williams

By Bob Tita 

Paint maker Sherwin-Williams Co. could move a step closer to expanding access to do-it-yourself house painters if shareholders from Valspar Corp. approve the sale of their company Wednesday for as much as $9.3 billion.

The monthlong balloting by Valspar investors will culminate with a special meeting Wednesday morning when results of the vote will be revealed.

But even if shareholders approve the sale of Valspar to Sherwin-Williams, it could take months for them to find out how much they will actually receive.

Cleveland-based Sherwin-Williams has agreed to pay up to $113 a share for Valspar's. The offer represents about a 35% premium to Valspar's share price before the all-cash deal was revealed in March.

Valspar shares closed Tuesday at $107.61, but the final payout is contingent on regulatory review.

Federal antitrust regulators are combing through the two companies' business lines in paint and industrial coatings for potentially unfair market concentrations. If the Federal Trade Commission demands that certain businesses be shed as a condition for approving the sale, Sherwin-Williams would lower its purchase price.

If Sherwin-Williams is forced to divest businesses with more $650 million of annual revenue, the purchase price would fall to $105 a share. Sherwin-Williams could abandon the purchase entirely if the required business divestments amount to least $1.5 billion a year in revenue.

"Both companies want to get the deal done," said Ghansham Panjabi, an analyst at Milwaukee-based Robert W. Baird. "But they would not have structured the deal that way if there wasn't a potential for antitrust."

Executives from both companies have said they believe the probability of having to shed business is low. Although both companies make paint, their retailing strategies are different.

The companies are counting on the distinctions to help keep the deal intact.

Minneapolis-based Valspar mostly sells paint through a variety of consumer-focused store chains, including do-it-yourself home improvement retailers, such as Lowe's Co. and Ace Hardware stores.

Sherwin-Williams, meanwhile, relies on more than 4,000 company-owned stores in the U.S. and Canada to sell paint, primarily to professional painters and contractors. These specialty paint stores have come under increasing competitive pressure in recent years from big-box retailers.

With Valspar, Sherwin-Williams would get more exposure to the major retailers. Sherwin's consumer-market paint brands include Dutch Boy, HGTV Home and Minwax wood stains.

The two companies combined would account for about 20% of the paint revenue at do-it-yourself retailers in the U.S., according to stock research firm Morningstar Inc. That is slightly above competitors PPG Industries Inc. and Masco Corp, the maker of Home Depot's Behr brand.

Valspar's international business would decrease Sherwin's heavy reliance on the U.S. market. Valspar also generates about $2.5 billion annually from the sales of coatings to the packaging industry and other industrial users.

Overall, Sherwin-Williams expects its annual revenue from paint and coatings to grow by about 38% to $15.6 billion. The company anticipates pretax income increasing about 55% to $2.8 billion.

Reaching the profit target will hinge on the Sherwin-Williams' ability to shrink overhead expenses, material costs and other shared expenses. Sherwin is forecasting cost reductions of $280 million a year by 2018 and increasing to $320 million annually later on.

"Most of the savings is achievable," said David Wang, a Morningstar equity analyst.

Representatives for the two companies declined to comment Tuesday about the sale or the shareholder vote.

Write to Bob Tita at [e-mail]

(END) Dow Jones Newswires

June 28, 2016 21:55 ET (01:55 GMT)

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