Tuesday Ticker: AkzoNobel Chairman resists attempted ouster by shareholder

By Jeff Sanford

Toronto, Ontario — May 1, 2017 — In this week’s Tuesday Ticker, we look at the latest in the ongoing attempted acquisition of AkzoNobel by PPG, earnings reports from Axalta, Sherwin-Williams, LKQ and much, much more!

– The attempted takeover of AkzoNobel by PPG continued to play out last week. AkzoNobel responded to the request from shareolder Elliott Advisors to hold an “extraordinary general meeting” (EGM) so that shareholders could vote on a request to dismiss the Chairman of the Supervisory Board, Antony Burgmans.

Elliott Advisors apparently hoped that replacing Burgmans would lead to AkzoNobel accepting the latest PPG bid. Under Dutch law the Chairman holds special rights concerning the ownership of the company. According to a press release distributed by AkzoNobel management the “request for an EGM to dismiss Chairman of the Board does not meet required standards under Dutch law.”

The press release went on to say that the company was respectful of shareholder rights.

“Within the last week alone, the management of AkzoNobel has held face-to-face meetings with shareholders at an Investor Day followed by an extensive international shareholder road show and today’s Annual General Meeting (AGM). This dialogue will continue to be intensive and the valued insights of AkzoNobel shareholders will be carefully considered by the Board of Management and the Supervisory Board … AkzoNobel fully supports the rights that shareholders have under Dutch law. One of these rights is for shareholders representing at least 10 percent of issued share capital to request a general meeting as qualified by Dutch law. According to Dutch law, this includes meeting standards of reasonableness and fairness and a ‘legitimate interest’ test … The Supervisory Board has concluded that the request from Elliott Advisers to dismiss the Chairman does not meet the standards required under Dutch law. The request is irresponsible, disproportionate, damaging and not in the best interests of the Company. Given the sole agenda item, there is no legal basis for calling an EGM.”

Some observers have suggested the case will eventually end up in court, where these issues will be ruled on.

– The CEO of Axalta, Charles Shaver, hosted a conference call for analysts addressing the company’s latest earnings report. According to Shaver, “Our results overall were strong and were led by a robust 8.9 percent volume growth … Overall, we continue to see a favorable global business climate driving stable demand for products in the vast majority of our markets, as well as some stabilization in Latin America that we remarked on our last quarter, and fairly steady vehicle demand in North America for both light vehicle and commercial vehicle end markets.”

Axalta posted net sales growth of 7.7 percent for the period. The company enjoyed volume growth of 8.9 percent, the company’s “strongest for some time,” according to Shaver. “We’re particularly pleased to see positive organic growth … for all four of our end markets.”

Shaver noted that a “certain headwind seen in 2015 and 2016 bottomed in the fourth quarter of last year. This includes broader line America demand as well as areas of industrial and commercial vehicle coatings that tempered growth during 2016.”
Axalta had a “highly eventful quarter,” starting with the successful completions of the Ellis Paint Company and Century Industrial Coatings acquisitions. Earlier this month, the company also announced its largest transaction to-date, the agreement to purchase the North America industrial wood coatings business of Valspar for $420 million.

The closing of that deal is still subject to Federal Trade Commission and Canadian competition bureau approval.

“Our M&A pipeline remains robust and we’re not signaling a required pause in either deal activity or potential share repurchases. Our credit metrics and capital headroom remain excellent giving us substantial maneuvering room for future opportunities,” said Shaver.

Commenting on end markets, Shaver said that “Axalta’s refinish business is expected to remain stable and to support low to mid-single digit core growth for the full year with potential upside from share gain and geographic expansion efforts … It’s encouraging to see that both the energy markets in North America and the broader Latin America industrial end market appear to stabilize in the recent months to mitigate further headwind seen over the last several years.”

Axalta management also said they expect light vehicle sales to grow slightly this year driven by global auto production. “The first quarter outcome also supports this outlook with overall global production up 5.8 percent in the first quarter coming from upside to earlier forecasts in all four regions. We do expect the potential moderation of this rate however as the year progresses,” said Shaver. “For adjusted [earnings], we reiterate our full year range of $930 million to $980 million.” 

Commenting on the development of global markets Shaver said, “[We] see more sell-through of mainstream and economy products in certain markets, notably in China, somewhat in the US and also in [Europe, the Middle East and Asia] in some of the periphery countries … I think as we continue to grow our presence in mainstream and economy products overtime, we would expect this counter balance in otherwise strong mix that we see from higher end professional body shop sell-through in other markets. That’s with regard to refinish.”

– The Sherwin-Williams Company also announced financial results for the first quarter. According to a press release net sales increased $187.4 million, or 7.3 percent, to $2.76 billion in the quarter. This was due primarily to higher paint sales volume in the Paint Stores Group and a change in revenue classification which increased sales in the quarter by 2.2 percent. The Global Finishes Group saw net sales increase 3.6 percent to $470.3 million in the quarter primarily due to higher paint sales volume and selling price increases.

Commenting on the financial results, John G. Morikis, Chairman, President and Chief Executive Officer, predicted that in the second quarter, “… we anticipate our consolidated net sales will increase a mid to high single digit percentage compared to last year’s second quarter … we estimate [net income] per common share … to be in the range of $4.15 to $4.35 per share, including a $.25 per share charge from costs associated with the anticipated acquisition of Valspar, compared to $3.99 per share earned in the second quarter of 2016.” Full year 2017 [net income] per common share guidance includes a $.40 per share charge from costs associated with the anticipated acquisition of Valspar.

– Parts recycler LKQ enjoyed revenue growth of 21.9 percent in the quarter, resulting in record revenue of $2.34 billion. Robert Wagman, President and Chief Executive Officer of LKQ was quoted as saying, “I am particularly pleased with the margin improvement in the quarter, notably North America which increased [margins] … year-over-year. Global revenue growth in parts and services was a strong 24.5 percent on a constant currency basis. Also, despite the mild weather we again faced in North America during the first quarter, global organic revenue growth for parts and services was 4.5 percent, consistent with our annual guidance.”

Wagman hosted a conference call in which he provided some more details about the business and the weather this year. “During March, the average contiguous US temperature was over 10 percent warmer than the 20th century average. Record and near-record warmth spanned the West and Great Plains. Behind Q1 2012, the first quarter of 2017 was the second warmest first quarter period on record. Comparatively, the first quarter of 2016 was the fourth warmest … According to CCC, collision and liability related auto claims for the quarter were up only 1.1 percent nationally, 70 basis points lower than what we were able to achieve in North America parts and services growth … Furthering that point, according to the industry and supplier research, many of our collision shop customers and the smaller distributors faced flat-to-down results during Q1,” said Wagman. “With that said, and despite the weather headwind, during the quarter North America witnessed tremendous margin improvement with segment EBITDA increasing 210 basis points sequentially and 110 basis points year-over-year … During Q1, we purchased 75,000 vehicles for dismantling by our North American wholesale operations, a 4.2 percent increase over Q1 2016. As for volume at the auctions, the outlook for supply remains strong and the pricing dynamics we are witnessing are attractive … For our North American aftermarket business, we continue to see the expansion of our total collision [stock keeping units] offerings as well as the total number of certified parts available, each growing 9 percent and 17 percent, respectively, year-over-year in the quarter.”

Related Market Notes

– Bank of America Merrill Lynch cut its price forecast on shares of Tesla last week, claiming “the electric car maker’s long-term viability” was at risk. Tesla, of course, has been enjoying a rocketing share price, passing GM in terms if total market capitalization.

The Merrill Lynch analysts aren’t buying the hype. They expect the stock price, “will be nearly cut in half over the next 12 months because positive earnings and cash flow [are] now even more elusive.” This is primarily due to the acquisition of another Elon Musk company, SolarCity.

According to Merrill Lynch analyst John Murphy, “We believe the SolarCity acquisition introduces material risks to the longer-term viability of TSLA, while the recent capital raise only serves to further dilute potential shareholder value.”

According to a report, “SolarCity has struggled financially despite revenue growth, while Tesla has continued to burn cash in pioneering the electric vehicle market.” Tesla has been relying on share offers to raise money. The company has raised cash through share offerings every year since 2008.

Eventually shareholders are going to balk the company has to rely on earnings from actual car sales. “Murphy sees Tesla shares falling to $165, a 46 percent drop from where the stock closed [recently] at $308.03 a share,” according to a report.


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