Bloomberg reports that Ton Buechner, CEO of AkzoNobel, has been “jolted into dealmaking” as a way of fighting off the PPG bid that recently surfaced.

By Jeff Sanford

Toronto, Ontario -- March 20, 2017 -- In this week’s Tuesday Ticker, we look at speculation that AkzoNobel is preparing for a sweetened bid from PPG and may be eyeing Axalta, the near future may see a high number of insurance company acquisitions (and divestitures) and much, much more!

- The US Federal Reserve, the central bank of the United States, raised its basic interest rate a quarter of a percentage point last Wednesday. The increase was no surprise. Markets were anticipating a rise, so there were no big reactions. But many are consider the move the first of a series of increases that could push rates higher than they have been in many years. Central banks began lowering rates to radically low levels in the wake of the Great Recession of 2008. That unprecedented period of fiscal stimulus may now be coming to an end, and so there are warnings that, “... consumers need to get ready for even higher interest costs” in the years ahead. As many as two more rate hikes could be coming this year followed by three more in 2018, according to a report by the CBC. This could make borrowing more expensive over the years to come. The quarter rate rise from the fed will likely feed through to lending rates for new fixed-rate
mortgages here in Canada.

- AutoCanada , one of Canada's largest multi-location automobile dealership groups, has announced financial results for the full year 2016. The company runs several hundred collision repair bays as part of its operations. Revenue from existing and new dealerships remained flat at about $2.9 billion in 2016, down very slightly from the year previous. Gross profit also remained flat at $486.1 million in 2016 from $487.7 million in 2015. The company generated basic earnings per share of $0.09, which is a bit less than the $0.93 posted for 2015.

More troubling was a decrease in same store sales, where revenue decreased by 5.6 percent in 2016 compared to 2015. AutoCanada also reported fourth quarter results. In that quarter, “... same store revenue decreased by 10.0 percent ... compared to the same quarter in 2015.”

Steven Landry, Chief Executive Officer, was quoted in the press release announcing the results: "Fiscal 2016 capped off the second consecutive year where our core markets faced deteriorating business conditions. However, wherever there are challenges there are also opportunities, and I believe AutoCanada is well-positioned to execute on its strategy and create value for shareholders. We are responding to economic conditions in our key markets by focusing on market share, operating expenses, accretive acquisitions, and delivering consistent performance across all of our dealerships."

Shares in ACQ sold off almost 10 percent over the day. AutoCanada also announced that Thomas Orysiukis will be resigning from his position as President and as a member of the Board of Directors. Steven Landry, CEO of the company, will assume the role of President.

- A report by Bloomberg notes that the CEO of AkzoNobel has been “jolted into dealmaking” as a way of fighting off the PPG bid that recently surfaced. AkzoNobel rejected the $22 billion bid immediately, but executives at Akzo are said to assume that another, higher, bid will be forthcoming from PPG. The CEO of AkzoNobel, Ton Buechner, is said to be, “... rallying support to separate out chemicals business,” as a way of raising money to make acquisitions and fight off PPG, according to the report.

A flood of stories have appeared in the financial press over the last week. Some note that the office of AkzoNobel is hopping these days. It is said that Buechner, “... has assembled a task force of [Akzo] executives and advisers that meets daily with the expectation PPG is poised to sweeten its $22 billion offer ... The CEO is even wary of traveling because he doesn’t want to be caught on the road in the event of a new bid,” according to one report. The Akzo execs are also busy calling around to shareholders in a bid to shore up support for the sale of the chemicals business. Speculation is that the money raised from selling off that division could raise $11 billion (the division makes up a third of the company’s earnings).

That money could then be put toward an attempted tie-up with another company. What target might Akzo consider? One report notes that a company that has “... been on Akzo’s list for years,” is Axalta. The report goes on to suggest that, “Buechner faced frustration from within the company,” when he didn’t acquire Axalta in 2013.

Last week shares in Axalta surged 4.4 percent. That's the biggest gain in more than a year as speculators jumped into the stock in anticipation the company could be pulled into the merger flurry now picking up. It is also reported that, “Large buyout firms are considering teaming up or finding partners to bid for Akzo’s chemical business ...” Early speculation is that a group of private equity firms could get together with BASF to pick up that division. Reports also note that the, “The brisk pace of consolidation throughout the industry may be intensifying PPG's desire to get bigger,” as domestic paint rivals Sherwin-Williams and Valspar put the “finishing touches” on their merger. Interesting times! More on this story is sure to come. Make sure to check back here each Tuesday for updates.

- For its part, Axalta has yet to comment on any of the speculation. The only announcement it made last week was that it will, “... increase prices of certain refinish and industrial coatings products in Greater China. The price increase was primarily due to the increase in the costs of raw materials. The price increase will affect certain refinish and industrial coatings customers, select light and commercial vehicle OEMs, and sub-suppliers to these end markets.”

Steven Markevich, Axalta’s Executive Vice President and President of Transportation Coatings and Greater China, was quoted as saying, “The upward pricing pressure on the cost of our raw materials reflects multiple factors beyond our control including the availability of feedstocks, increased regulatory requirements, and a limited number of suppliers that meet our rigorous quality standards.”

- In a research report revealed to clients by RBC Capital Markets on Friday, the investment bank increased its target price of Boyd Group Income Fund to $89.00. The firm at present has “Sector Perform” rating on the stock. Boyd Group Income Fund also announced a cash distribution for the month of March 2017 of $0.043 per trust unit. Units in the Boyd Group Income Fund currently trade around $86 a share.

Related Market Notes

- Donald Trump's decision to renegotiate CAFE standards is being hotly debated. A report in the New York Times points out some of the ways in which it would be very difficult for OEMs to reach the 2025 standards. According to the story, “... just four percent of the vehicles on the road would meet the 2025 standards.” The idea that the entire auto fleet could be turned over before the deadline seems highly optimistic in that case. A letter from concerned auto execs points out that, “... conventional vehicles make up 96.5 percent of the new light-duty vehicle fleet, and none of these conventional vehicles are compliant with the fuel economy standards envisaged in 2012.” To achieve compliance with those regulations and retool the auto industry to produce cars light enough to achieve those standards would require the automakers to spend, “... more than $200 billion between 2012 and 2025 ... The issue becomes graver because consumer preference has now shifted toward SUV and pick-ups, away from fuel-efficient small cars.” According to the report, “This explains why automakers are clamoring for a repeal of the emission control standards.”

- Mergers may be the story in the insurance sector as well this year. A recent KPMG survey finds the vast majority of insurance companies plan to make acquisitions in 2017. According to the report, “To succeed in this dynamic environment organizations are re-evaluating their portfolio of business and rationalizing their global footprint to strategically determine ‘where to play’ and ‘how to win’ in the future.”

More than 84 percent of insurance companies surveyed plan to make one to three acquisitions this year and 94 percent plan at least one divestiture, according to the report.

- A report on Taiwan News notes that, “Taiwanese LED manufacturers are set to benefit from the global automotive industry’s demand for LED lighting.” The auto sector will drive future adoption of LEDs. Home lighting applications are slowing as that market becomes saturated. But the auto industry continues to ramp up its use of the low-energy lights. According to the story, “... the LED penetration rate in the auto industry has improved but remains low at 12 percent for headlights and 16 percent for fog lights. The publication expects the production value CAGR to reach 18 percent and 15 percent, respectively, in 2015-2020 ... While the panel industry will gradually replace LEDs with OLEDs, the growth of technology in vehicles indicates that more LEDs will be needed for dashboard panels, as well as other applications, in vehicles.”



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