Sherwin-Williams deal tinted trustbuster yellow

Published Tue, Mar 22 20165:00 AM EDTUpdated Tue, Mar 22 20165:34 AM EDT

Breakingviews

Jeffrey Goldfarb

Sherwin-Williams obviously doesn't want to paint itself into a corner. The 150-year-old paint and coatings maker is buying smaller rival Valspar for $11.3 billion, including debt. The companies expressed confidence that the deal would pass regulatory muster. Sherwin-Williams, though, has also crafted an escape route. For an industry that's generally as boring as watching its main product dry, Sherwin-Williams has been on some kind of roll. Its shares have soared by 260 percent over the past five years, five times the performance of the S & P 500 Index over the same span, as the U.S. housing market rebounded. The stock also trades at 26 times earnings, suggesting yet more growth to come. The acquisition of Valspar in theory should add an extra coat of gloss. It will expand Sherwin-Williams from its highly successful, own-store model that caters to professionals to big-box retailers and DIY customers. Executives also anticipate the deal will deliver $280 million of annual cost savings within two years, which is more than 6 percent of Valspar's yearly revenue. Taxed and capitalized, those synergies would be worth about $1.9 billion today. The 35 percent premium to Friday's closing price that Sherwin-Williams is paying for Valspar's stock, however, amounts to $2.3 billion. Even an additional $40 million in savings Sherwin-Williams expects longer-term wouldn't cover it. That raises some questions about the financial logic of the acquisition. More from Breakingviews : Valeant's multiple organ failure puts it in ICU Both companies say there's an "unlikely event" that competition authorities will force the sale of any businesses before giving their stamp of approval. If more than $650 million of Valspar's sales have to be divested, however, the purchase price gets slashed by 7 percent, from $113 to $105 a share. Should regulators want more than $1.5 billion in revenue sold, Sherwin-Williams can walk away. The structure suggests a certain amount of prudence on the part of the buyer, which was stung a few years ago. Mexican regulators blocked Sherwin-Williams from acquiring Consorcio Comex in 2013, and later allowed rival PPG Industries to buy it. Even so, the Valspar structure complicates matters for both sets of shareholders, who may be confounded about how to interpret the deal. They can either look at it through the rose-colored words of the two companies, or by their actions, which are tinted trustbuster yellow. For more independent commentary and analysisfrom Reuters Breakingviews, visit breakingviews.com

Sherwin-Williams

Daniel Acker | Bloomberg | Getty Images

For an industry that's generally as boring as watching its main product dry, Sherwin-Williams has been on some kind of roll. Its shares have soared by 260 percent over the past five years, five times the performance of the Index over the same span, as the U.S. housing market rebounded. The stock also trades at 26 times earnings, suggesting yet more growth to come.