By Jeff Sanford
Toronto, Ontario — June 26, 2017 — This week’s Tuesday Ticker uncovers the Uni-Select/Carl Icahn connection, takes a look at jobber consolidation, digs into the emails exchanged between the Dutch government and AkzoNobel and much, much more!
– David Roberts of Focus Automotive distributed some notes about “two significant private equity (PE) investments in the jobber industry … in the past week.”
Riverarch Capital, a private equity affiliate of PNC (formerly Pittsburgh National Bank), led a recapitalization of Platinum Jobber Painters Supply and Equipment Company of Taylor, Michigan. The Taurence family, PSE’s controlling shareholder, sold their interest to Riverarch. As well, WestView Capital, a $900 million PE firm out of Boston, acquired English Color and Supplies of Richardson, Texas, a large multi-line jobber. In both transactions key management personnel were retained, according to Roberts’ report.
He notes that, “In a typical PE transaction, the new investors buy a controlling interest in the firm while also incentivizing management to stay and accelerate the growth of the firm. Often times the PE investors put up only a portion of the purchase price in cash while the remaining capital consists of various forms of debt, secured by the assets of the company. In contrast, strategic buyers (FinishMaster, NCS and LKQ) often buy entirely for cash because their cost of capital is significantly less.”
Roberts also notes the size of these two targets was “significantly larger than any previous Platinum jobber except for the Single Source acquisition by NCS in 2015.” According to him it’s “interesting” the successful bidders were PE firms, not strategic buyers. In the recent past, the successful bidders for large targets have been strategic (FinishMaster on Gladwin and D’Angelo, NCS on Single Source). However with these two deals, “PE firms have won the prize.” According to Roberts, “With this new capital entering the jobber industry, growth by acquisition among the larger jobbers is likely to accelerate. The BASF growth initiative is also injecting new capital into independent jobbers focused on converting shops to the BASF brand. Together these events accelerate the change and uncertainty in the industry, increase the requirement for additional capital for jobbers that intend to grow and thrive and further cloud the future of smaller jobbers.”
Uni-Select
– The Bumper to Bumper subsidiary of Quebec-based distributor Uni-Select announced it acquired the family-owned Owen Sound-based KC Distributing. The company’s name also came up in a story in a Philadelphia newspaper about Carl Icahn’s newly formed Pep Boys network (which is based in Philly). Icahn, who also sometimes advises Donald Trump, has pushed into the auto space since 2015. He’s come to operate 1,000-plus auto-parts stores, repair garages and tire warehouses made up out of Beck/Arnley Worldparts, Federal Mogul and Pep Boys.
This past week it was announced that Icahn had bought another parts company, Precision. It was also announced that Daniel A. Ninivaggi would be the new chief executive at Icahn Automotive Group, the company that holds the new chain. Ninivaggi replaces Brent Windom, who has returned to Uni-Select.
Sherwin-Williams (SHW)
– Investor are taking a good look at Sherwin-Williams now that the Valspar deal has gone through. Citigroup initiated analyst coverage on the stock and assigned it a target value of $410.00. That price target would be a 16 percent increase over recent prices. Analysts attributed the optimism “… to a far more diversified portfolio of paints and industrial coatings, with a much more global footprint … With professional paint market dynamics remaining favorable … the Valspar transaction broadens the depth and breadth for the company’s industrial coatings, providing revenue synergy opportunities,” according to a report.
Axalta
– China Daily notes that Axalta has opened a technology centre in the country and plans to invest more there. Charlie Shaver, Axalta Chairman and CEO, gave the paper an interview. “The majority of our organic growth today comes from China,” Shaver was quoted as saying. He said that coating business revenue growth in China grew at a much faster pace than in North America and Europe.
According to the newspaper story Shaver admitted that, “… the slowing Chinese economy to some extent weighed on the expansion of the industrial coating business, but the booming Chinese auto market was buttressing its transportation coating and refinishing business.”
China’s economy grew at 6.7 percent in 2016, “its slowest pace in about a quarter of a century,” according to the report. Shaver was also quoted as saying that the company was “delighted” with the investment and business collaboration with local partners over the past decades.”Chinese clients know their business very well and are good at explaining their challenges in finding solutions. Chinese customers are becoming more sophisticated, and we are sharing the best global practices with Chinese local bodyshop owners,” he said. The company has invested more than $100 million in China since 2013.
3M
– 3M has announced the appointment of Michael Romon as Chief Operating Officer and Executive Vice President. Hak Cheol Shin has been appointed Vice Chair and Executive Vice President. The new appointments are effective on July 1, 2017. The two will report directly to Inge Thulin, 3M’s Chair, President and Chief Executive Officer.
AkzoNobel
– Media stories continue to appear weeks after the attempted takeover of Dutch paint maker AkzoNobel by PPG. The latest revelation: AkzoNobel “cooperated closely with the Dutch government from at least March 9, the date … PPG Industries’ attempts to buy Akzo were made public, according to emails seen by Dutch broadcaster RTL. The emails, obtained under a freedom-of-information request, showed AkzoNobel employees sending non-public information to government officials, and officials consulting with the company on how to respond to questions from parliament.”
A Reuters story goes on to note that, “On March 9, Akzo sent two emails to the ministry hours before Kamp appeared in public to say an AkzoNobel takeover would not be in the Dutch national interest … Later Kamp introduced draft legislation giving listed companies the right to reject foreign buyers for a year.”
PPG
– London paper the Telegraph commented on the crashed deal as well. According to the paper: “Active investors like nothing better than a decent slug-it-out takeover battle and one of the best corporate ding-dong in years is the fight for control of AkzoNobe … For months, [Akzo] has been fending off the attention of the US concern PPG Industries. Then along came the active and aggressive US hedge fund, Elliott Advisors. With only 4 percent of the shareholding, it launched legal action (as it did on Argentine bonds) to oust the Akzo chairman and replace its directors with its own nominees – a ploy it has used before. What made this action interesting was that Akzo has a unique and decades-old Dutch anti-takeover defence that makes it almost impossible for shareholders to overthrow the company’s board and install new directors. Elliot lost its legal action.”
According to the paper, “PPG Industries had been the subject of dark mutterings. Its sales last year at $14.7bn (€13.6bn) are the lowest in the last three years. Net earnings are not much better, showing a decline from $2bn in 2014 to $877m last year. It was whispered that the PPG bid may well have been aimed at diverting attention away from its static sales and flagging profits.” But, “In the end,” as the Telegraph story notes, “… the Akzo resistance seems to have won the day. At the beginning of June, PPG retired from the battle and the rules dictate that it cannot consider re-entering the pursuit for another six months. But that may not be the end of the story. Akzo, in its stout-hearted, three-month defiance, put a lot of noses out of joint … Influential investors are now saying that their interests were not prioritised.”
Related Market Notes
– The S&P Automotive Retail Index, measuring the performance of parts sellers in the S&P 500, has “hit its lowest level since February 2016,” according to reports.
– The Parliamentary Budget Officer is worried that the expected, gradual rise of interest rates over the next few years is “poised to push the financial vulnerability of indebted Canadian households well above levels seen in the last three decades,” according to a report. According to the PBO higher rates expected in the coming years will leave households exposed to economic shocks at “levels beyond historical experience.” Rising debt levels have made households increasingly vulnerable to economic shocks. If rates rise, Canadians will find it more difficult to pay down their debt. According to a report by the Hamilton Spectator, “The PBO is projecting the central bank’s rate to rise to three per cent by mid-2020. It predicts the household debt service ratio to reach 16.3 per cent in 2021, which would be nearly 3.5 percentage points higher than the 12.9 per cent average seen between 1990 and 2017.” Canadians would have less money to spend on consumer goods and services in such an economy.
– Embattled airbag maker Takata has, “… filed for bankruptcy protection in the United States and Japan, citing more than $10 billion of liabilities related to lethal airbags.” According to a report by Reuters, “This is a big opportunity for smaller rival Key Safety Systems, a Chinese-owned American brand which agreed in principle to buy most of the business for $1.6 billion. There was no way the Japanese parts supplier could afford the industry’s biggest-ever recall. So while some proceeds will go into an $850 million restitution fund, as agreed with the US Department of Justice, that will hardly cover the total costs incurred by its customers, including Honda, Toyota and others. A residual business will keep supplying replacement airbag inflators before being wound down. Everything else Takata sold can now be bought from KSS. And partnering with KSS, rather than a big competitor like Autoliv, means carmakers retain more choice in suppliers. As recently as January, Takata’s market value exceeded $750 million despite looming liabilities. This is a huge boost for KSS. It implies a dramatic increase in scale.”
