Sherwin-Williams Co. (NYSE: SHW), the largest U.S. paint retailer, said it agreed to buy rival Valspar Corp. (NYSE: VAL) for about $9.3 billion in cash to become the world’s biggest coatings maker.
Sherwin-Williams will pay $113 a share, the companies said Sunday in a statement. The price is about 35 percent higher than Valspar’s closing price of $83.83 on Friday, when its market value reached $6.63 billion. Valspar jumped 26 percent to $106 in pre-market trading.
John Morikis, chief executive officer of Sherwin-Williams, is forging the company’s biggest deal ever less than three months after succeeding longtime CEO Christopher Connor. Sherwin-Williams, which gets 84 percent of sales in the U.S., gains a company that generates almost half of its revenue abroad while also adding coatings for coils and packaging. Valspar will help Sherwin-Williams expand in the Asia Pacific region and Europe, Morikis said in an interview.
“This accelerates the strategy we have long had in place,” Morikis said by telephone Sunday. “Valspar is a company we have long admired.” Morikis said the talks started after his Jan. 1 start as CEO, when “the stars aligned.”
Sherwin-Williams paint stores and brands such as Dutch Boy, Easy Living and MAB helped generate sales of $11.3 billion last year. The company will add $4.39 billion of Valspar revenue from brands such as Valspar Ultra and Duramax, 12 percent of which comes from China and 7 percent from Australia, according to data compiled by Bloomberg.
The deal “makes a ton of strategic sense,” said Dmitry Silversteyn, a Cleveland-based analyst at Longbow Research who has buy recommendations on both companies. It boosts Sherwin-Williams’s sales to U.S. do-it-yourself paint customers, international markets and industrial coatings markets, three areas where the company is under-exposed, he said in an e-mail Sunday.
The combination also will catapult Cleveland-based Sherwin-Williams from the world’s third-largest paint company to first, surpassing industry leader PPG Industries Inc. (NYSE: PPG) and Akzo Nobel NV, Morikis said. Minneapolis-based Valspar is ranked No. 4. PPG won Mergers & Acquisitions M&A Mid-Market Strategic Buyer of the Year Award for 2014 after making a handful of coatings purchases.
Sherwin-Williams has gained 11 percent this year, closing at $288.69 on Friday. The shares have more than tripled in the past five years, while Valspar’s stock has more than doubled. Stock of Sherwin-Williams trading in Germany exchanged at $286 at 11:13 a.m. local time. The two companies plan to hold a call for analysts and investors at 8 a.m. New York time to discuss the transaction.
If antitrust regulators require divesting assets that generate more than $650 million in revenue, the transaction price would drop to $105 a share, and if more than $1.5 billion of divestitures are necessary for approval Sherwin-Williams has the right to terminate the deal. Morikis said the company expects antitrust regulators will require minimal divestitures at most. Sherwin-Williams abandoned a bid in 2014 to acquire Comex, Mexico’s largest paint company, after Mexican regulators blocked the sale.
Including $2 billion in Valspar debt that Sherwin-Williams will assume, the transaction is valued at $11.3 billion, Sean Hennessy, chief financial officer of the acquiring company, said by telephone. The equity purchase will be financed with $8.3 billion of new debt and $1 billion of cash, he said. The company said it has committed bridge financing from Citigroup Inc.
Sherwin-Williams said it expects to wring $280 million of annual savings from the combination within two years, eventually rising to $320 million. The deal should close by the end of the first quarter next year, the companies said. The combined company will have 58,000 employees.
Citigroup acted as lead financial adviser to Sherwin-Williams, which also received advice from JPMorgan Chase & Co. Jones Day and Weil, Gotshal & Manges LLP were legal advisers.
Goldman Sachs Group Inc. and Bank of America Corp. provided financial advice to Valspar, which had Wachtell, Lipton, Rosen & Katz as its legal adviser.