Shares of coatings giant PPG Industries (PPG - Analyst Report) shot up to a new high after it agreed to buy Mexico’s leading paint company – Consorcio Comex S.A. de C.V. – for $2.3 billion to reinforce its architectural coatings business in Mexico and Central America. The acquisition is subject to regulatory clearances and other closing conditions.
Privately-held Comex, which had revenues of roughly $1 billion last year, makes architectural and industrial coatings and related products in Mexico. The company has 8 manufacturing facilities and 6 distribution centers and markets its products through around 3,600 stores in Mexico and Central America.
PPG Industries' shares climbed as much as 4.4% in the trading session following the announcement to strike a new 52-week high of $213.01 yesterday. The stock pulled back to eventually close the day at $210.15, gaining around 3%.
The deal comes after U.S. paint major Sherwin-Williams (SHW - Analyst Report) ended its pursuit of Comex’s Mexican business in Apr 2014. Sherwin-Williams, in Nov 2012, agreed to buy Comex for roughly $2.34 billion. The company, in Sep 2013, completed the acquisition of the U.S. and Canadian businesses of Comex.
However, Sherwin-Williams’ appeal related to the acquisition of Comex’s core Mexican business was denied and the acquisition was declared unauthorized by the Federal Economic Competition Commission (“FECC”) in Mexico in Nov 2013. Prior to that, the Mexican antitrust regulator rejected the deal in Jul 2013 citing that the merger would allow the combined company to set artificially high prices and commit anti-competitive practices, thereby damaging consumer interests.
Under the terms of the stock purchase agreement, either Sherwin-Williams or Comex had the right to end the deal if it did not consummate on or before Mar 31, 2014. Comex, however, accused Sherwin-Williams for breaching its obligations under the agreement by not using commercially reasonable efforts to close the deal.
The acquisition is a strategic fit and highly complementary to PPG Industries as it will boost its foothold in Mexico and Central America by offering a leading architectural coatings portfolio. The deal is in sync with the company’s strategy to broaden its global coatings business.
PPG Industries expects the transaction to be immediately accretive to its earnings, barring acquisition costs. It also expects to achieve acquisition-related synergies of 3%-4% of acquired sales over two years.
While PPG Industries plans to finance the deal with its existing cash and short-term investments (of $3 billion as of Mar 31, 2014), it may fund a part of the purchase consideration by raising debt.
PPG Industries is taking steps to grow its business inorganically by making a bevy of acquisitions. The acquisition of Akzo Nobel’s (AKZOY - Snapshot Report) North American architectural coatings business, in Apr 2013, has bolstered its branded paint product offerings and scale in the North American architectural paint market.
Moreover, PPG Industries acquired specific assets of specialty coatings company Deft Incorporated last year in an effort to boost its position in the aerospace industry. The acquisition of Hi-Temp Coatings Technology, in Mar 2014, also strengthens PPG Industries’ protective and marine coatings business. More recently, the company bought Panama-based Canal Supplies, which will help it to expand its protective and marine coatings business in Central America.
PPG Industries is a Zacks Rank #3 (Hold) stock.
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