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PPG Industries: Akzo Deal A Strong Fit Ahead Of A US Housing Recovery

 December 19, 2012 12:13 PM

(By Mani) With its proposed $1 billion acquisition of Akzo's North American house paint business PPG Industries, Inc. (NYSE: PPG) has found a use for the $900 million in cash proceeds from its soon to be completed commodity chemicals divestiture.

Importantly, PPG has done so in a financially attractive, strategically important (more than doubles the size of its $1 billion US house paint business), while furthering its transformation to a pure play coatings and optical company.

Pittsburgh-based PPG has agreed to acquire AkzoNobel's North American (NA) architectural coatings business for $1.05 billion. With $1.5 billion in 2011 sales, PPG is paying 0.7x sales. The business lost $60 million in EBITDA in 2011 but is expected to be slightly EBITDA positive in 2012.

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The deal comes at a time when the ongoing recovery in the U.S. housing market is expected to continue next year, with strong gains in residential construction and home prices. There have been improvements in home resales in October while positive trends were seen in existing and new home sales, coupled with rising prices and falling foreclosures.

"Assuming the full $160MM of op. Profit improvement targeted by PPG coupled with D&A of $55MM(E), PPG is paying an attractive 4.8x EBITDA (of $220MM) for the Akzo business (or 5.2x including the $100MM of cash costs required to realize the synergies)," Deutsche Bank analyst David Begleiter wrote in a note to clients.

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Moreover, the acquisition more than doubles PPG's North American architectural coatings presence, extends presence in all three architectural distribution channels, and expands North American company-owned store network to approximately 1,000.

The deal also complements PPG's national home center strategy by extending its branded paint product offerings to more than 8,000 retail outlets, and boosts already strong presence in the independent paint dealer channel.

Akzo's NA architectural coatings business (led by the Glidden brand) is the 2nd largest in NA with a #2 position in the US, a #1 position in Canada and a leading position in Puerto Rico and the Caribbean. The combination of Akzo's 600 paint stores with PPG's 400 will create the #2 paint store system in NA (with 1,000 stores).

PPG is targeting $160 million in operating earnings over a 3-year period including a $60 million improvement immediately upon closing and $90 million by the end of the first year. The deal is expected to close in early second quarter of 2013.

"On EPS, assuming mid-single digit sales growth, we estimate the acquisition will be approximately $0.05 accretive in Yr 1, $0.35 accretive in Yr 2, Yr $0.50 accretive in Yr 3 and $0.75 accretive in Yr 4," Begleiter said.

Meanwhile, PPG plans to re-initiate its share repurchase program immediately following the completion of the separation of its commodity chemicals business, which is expected to occur in early 2013. Share repurchases of between $500 million and $750 million expected in 2013.

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