The coatings and sealants markets have been consolidating for years, but innovation in the space guarantees that more deals are to come, says John Televantos, a partner at New York private equity firm Arsenal Capital Partners.
Arsenal has backed numerous coatings and sealants companies, including Accella Performance Materials, which bought IPS Polymer Systems in March. Arsenal has backed Royal Adhesives and Sealants since 2010, and announced a plan to sell the business to PE firm American Securities LLC on April 27. "The profile of the company in terms of profit margin, profit level (Ebitda) and growth rate is very attractive in today's markets," Televantos says.
Royal Ahesives is a serial acquirer with multiple acquisitions--including Advanced Polymers International in January-since Arsenal bought Royal in 2010. Other players in the market include 3M, Sherwin Williams and PPG Industries, which won Mergers & Acquisitions' M&A Mid-Market Strategic Buyer of the Year Award for 2014. Strategic buyers are often looking for coatings or sealants businesses separately, which is one reason why Arsenal doesn't combine the businesses, Televantos says.
Arsenal is very active in this space. Tell me why?
The reasons we like these businesses is that they are technology rich and in fragmented industries and niche segments where they provide tremendous value versus the price of the product. There are still opportunities to find good, smaller businesses; we expect to have another company under a letter of intent in the next few weeks.
There are more than a thousand adhesives and sealants companies, so there is plenty of room to continue to invest in these sectors. Entrepreneurs come up with new ideas and technology to spawn new companies. The successful ones come to a size where they need private equity capital to take them to the next level.
PPG Industries (NYSE: PPG), 3M (NYSE: MMM) and Sherwin Williams (NYSE: SHW) have all made acquisitions in coatings. Those companies have grown through acquisitions. PPG was primarily a glass company 50 years ago, and now they have primarily coatings, adhesives and sealants. They're very good - they don't do what we do, where we grow a company to a certain size and then look to sell - they buy for the long-term. PPG is one of the companies we would look to sell to.
Is Arsenal looking to sell any of the coatings or sealants businesses soon?
We have a certain strategic thesis, and if we implement it, then it's time for the next owner to do something different to create value. Market conditions are definitely a consideration, but we're a lot better at building companies with management teams and creating value that way. We're not that smart to call the market. We're a lot better at doing our job and creating value. Today, these are good times to be selling, so we're more sellers than buyers.
Do you ever think about combining the different coatings businesses you own?
Sometimes yes, most of the time, no. Adhesives and coatings companies appear to be similar, but they are different. Coatings are provided for aesthetics, or for protecting from the elements. Adhesives are usually replacing screws and nails - they really are different end markets and require different technologies and have different applications. Because of fragmentation the smaller companies can benefit from consolidation, and we've done a little bit of that. But combining them could create more complication than value if it were merely to create mass.
Combinations would allow us to create overhead synergies, but at our scale a pure-play execution strategy is easier. Different players want different pieces. PPG is more likely to buy a coatings company, and 3M is more likely to buy an adhesives company.
How high are multiples in the space?
You have to talk about it relative to the market - the multiples today are full but not insane. There are no stupid buyers, but there are sellers that take advantage of market conditions. Multiples are a little high versus the average, but today nobody sees a worsening of the U.S. economy in the near-term so people can buy with confidence and still make money. The cost of debt is so low, that when you add leverage your equity returns can be good. A company could go for up to 14 times EBITDA at the upper end, but a small niche business could go for half of that.
In sealants and coatings, will strategic buyers pay more than financial buyers?
That's not always the case. The paper chemicals business of Ashland went to Clayton Dubilier & Rice, and they paid more than any strategic was willing to pay. There are many circumstances for strategic buyers-- they are very picky and they want something that gives them a lot of synergies. If it doesn't fit, the financial buyers can pay full value and make good returns.
If it's a big enough company, the private equity firm will think about building it to an Initial Public Offering and get the benefits of the public market, which has happened a lot in the chemical industry. Until recently our companies were too small to consider an IPO but now some of them have reached that scale.