By Jeff Sanford
Toronto, Ontario — March 27, 2017 — The latest edition of Tuesday Ticker looks at the latest developments in PPG’s so-far unsuccessful bid for AkzoNobel, Sherwin-William’s acquisition of Valspar has been pushed back to June, XPEL and 3M settle their lawsuit and much, much more!
– PPG’s attempted acquisition of AkxoNobel took a more dramatic turn this past weekend. PPG has made two bids, but both of have been rejected. It seems top-level management at AkzoNobel really does not want this deal to go happen. According to a Reuters report, “A team of executives from U.S. paint maker PPG left the Netherlands on Friday without meeting their counterparts at AkzoNobel during a two-day charm offensive to win support for their proposed takeover of their Dutch rival.”
The story also notes that shares of AkzoNobel are trading at about 77.84 euros on Friday afternoon, “… well below the 89.6 euros implied by PPG’s cash and share offer.” That is, market speculators currently do not think this deal will go through. Even so, PPG execs continue to press for discussions.
According to the report, “PPG Chief Executive Michael McGarry remained open to meeting with AkzoNobel representatives ‘anytime and anywhere’, a PPG spokesman said.”
During their time in Holland the PPG team met, “with local media, officials from the Dutch Ministry of Economic Affairs, AkzoNobel shareholders and the VEB, an organization that represents shareholders in the Netherlands.” It looks like the PPG people are trying to build support for the deal among those friendly to shareholder interests. The company has a solid business case to make; the deal would give shareowners a substantial premium to the current price. Some shareholders are pushing for discussions between PPG and AkzoNobel.
“A poll of 50 AkzoNobel shareholders published by Sanford Bernstein found that 80 percent of them wanted Akzo’s management to enter talks with Pittsburgh-based PPG,” according to the Reuters report.
One of the company’s three largest shareholders, Elliott Management Corporation, distributed a press release outlining why it believes investors, “… representing 10 percent or more of Akzo Nobel’s capital could call for a special meeting to potentially remove the board … if AkzoNobel failed to engage with PPG.”
For its part, AkzoNobel seems to be arguing against the deal based more on the social importance of the company to the Dutch people. The company has put out a steady stream of releases noting its social efforts, including a pledge to become carbon neutral by 2050 and has warned pensions could be hurt if the company were bought out by PPG.
– In other consolidation news: Sherwin-Williams had to announce this week that its hoped-for deal to acquire Valspar will now be put off until June. The company cited, “regulatory hurdles as reason that the acquisition of a major competitor is running behind schedule.” According to a report, “Cleveland-based Sherwin-Williams now has until June 21 to wrap up its blockbuster, all-cash purchase of Valspar Corp. The companies agreed a year ago to an outside closing date of March 21, though Sherwin-Williams more recently expected that the transaction would occur in April.”
Sherwin-Williams execs claim the “hang-up” relates to the sale of a single business that regulators want the company to unload before buying Valspar. The company is in discussions with other companies who might be interested in buying the divested division.
“We are in discussions with a number of prospective buyers,” John Morikis, SHW’s Chairman, President and CEO, was quoted as saying in a news release. “We remain confident in our ability to complete the divestiture at a fair price, and we look forward to unlocking the value of the combined business when the Valspar acquisition closes.”
– XPEL Technologies Corp., a supplier of automotive paint protection and window protection films, and 3M, have announced they have reached a settlement agreement in a patent infringement suit that was filed in 2015. 3M had filed a patent infringement lawsuit in US federal district court in Minnesota against XPEL Technologies Corporation. The suit alleged that XPEL Technologies Corporation’s XPF paint protection film product infringes 3M’s, “US Patent No. 8,765,263, entitled Multilayer Polyurethane Protective Films.” 3M had asked for a court order barring XPEL Technologies from distributing the product in question. It seems the companies have come to a settlement. “I am pleased we have been able to resolve this matter and look forward to continuing to deliver high-quality products and services to our customers,” Ryan Pape, XPEL’s Chief Executive Officer was quoted as saying.
– Boyd released its 2016 numbers last week. According to a press release the company had “another record annual financial result for 2016,” with sales rising 18.1 per cent to $1.4 billion and same-store sales increasing 5.3 per cent. As well, net earnings increased 32.9 per cent to $52.6 million compared with $39.6 million in 2015. The increase in revenue were helped along by the 58 new locations the company added in 2016. This was the “second most” number of stores added since 2014, as consolidation in the collision repair market goes ahead.
In an earnings call CEO Brock Bulbuck claimed the results represent “strong progress” towards the company’s lofty goal of doubling the size of the company “between 2015 and 2020.” Said Bulbuck, “This is an important milestone,” referencing the company’s now 404 strong chain of stores. Boyd has already acquired another seven stores this quarter so far. “Our acquisition success is also a testament to the ability of our corporate development team to achieve our growth goals by ‘hitting singles and doubles’ thereby completing a greater number of smaller transactions,” said Bulbuck. “We are on pace and on the right track to achieve our goal of doubling our business by 2020.”
Bulbuck noted the company has $350 million worth of of cash and credit on hand to continue the acquisition streak.
The good growth in ‘same-store sales’ sales shows that Boyd is growing its business in each location, and is not just relying on acquisitions to grow. That’s a good sign of a healthy company. Bulbuck noted that buying only seven stores the first quarter of 2017 was actually “a little behind last year’s pace.”
– Seems as if a little bit of a shake-up is playing out at AutoCanada. The company recently underwhelmed in terms of earnings. The stock took a 10 percent hit. Now some people are being moved around. The latest announcement is that Mark Warsaba has been promoted to the position of Senior Vice-President & Chief Operations Officer effective April 1, 2017. Warsaba will report directly to Steven Landry, President & CEO, according to a press release. “Mark is an experienced and trusted leader who consistently delivers results. He is uniquely qualified to drive strategic prioritization and accountability within AutoCanada, with a laser-focus on operational excellence,” said Landry.
– Investment analysts at National Bank Financial lifted their Q4 2017 earnings estimates for shares of Uni-Select in a research report issued on Thursday according to a report. National Bank Financial analysts now expect Uni-Select to, “… post earnings per share of $0.47 for the quarter, up from their previous forecast of $0.46.”
Related Market Notes
– An interesting phenomenon is occurring in the bond market. The so-called “yield curve” is flattening. That is, the yield on longer dated bonds (say, the Canadian government 10-year bond) is not much higher than the yield on, for example 2-year Treasury Bonds issued by the Bank of Canada. The yield demanded by investors to hold a security represents, in some way, the risk they expect over that time period. Today, investors are demanding almost as much return to hold 2-year securities as they are a 10-year bond. That suggests investors think there is a more chaotic period to come in the next two years. Holding a 10-year bond should be much more risky than holding one for just two years. That investors are demanding a similar return for the two year suggests they think there could be a recession soon. An inverted bond yield curve—when yields on short-dated bonds are higher than long dated bonds—has proven to be a solid predictor of recessions. The bond yield curve is not yet inverted, but it’s getting close.
– In contrast to the American auto industry (where sales seem to be slowing) the Canadian auto sector has been kind of hot of late. According to recent economic data, “The automotive sector helped Canadian wholesale sales beat expectations and hit a record in January, in another sign of gathering strength in the economy.” Statistics Canada reports that “wholesale sales climbed 3.3 per cent to $59.1 billion in January, the largest monthly percentage gain since November 2009.” According to a report, economists had expected a gain of 0.5 per cent. The higher-than-expected sales were driven by autos. “The auto sector drove wholesaling crazy in January, enough for at least some eyebrows to be raised at what is typically seen as a second-tier Canadian economic indicator,” one economist was quoted as saying.
– Major American bond rating firm Moody’s released a report recently that suggests business will be boosted by aging vehicles in the years to come: “Auto parts retailers will continue to benefit as cash-strapped consumers look to reduce their car maintenance costs by using independent garages.” The Moody’s Investors Service report also said, “The sector also has sufficient competitive advantages to protect it from the threat of disruptive online retailers … The average age of US vehicles is at a historic high of 11 years and continues to climb, indicating that there is a lot of older ‘rolling stock’ on the roads that will require maintenance. Used car sales continue to hover around 40 million units, and auto dealers are increasing their presence in this segment of the auto market … The combination of these factors continues to provide a frothy environment for the auto parts sub-segment of retail.”
Market analysts also note the possibility of “same-day delivery” is one of the primary advantages that benefit the three major retailers, AutoZone, O’Reilly Automotive and Advance Auto Parts in the US.
“We believe that the advantage of a fully scaled nationwide same-day delivery capability, which is critical to maintaining relationships with independent garages — the commercial customers of the retailers — provides a significant ‘competitive moat’ against online competitors, including Amazon,” according to the report.