P P G (NYSE:PPG)
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3 Years : From May 2012 to May 2015
--PPG to Buy Akzo Nobel's North American architectural coatings unit
--PPG will pay $875 million in cash and take on $175 million in debt
--The company sees the deal positioning it to capitalize on a U.S. construction market recovery
(Updates with details throughout, share movement)
By Saabira Chaudhuri
PPG Industries (PPG) has agreed to buy the North American architectural coatings business of Amsterdam's Akzo Nobel NV (AKZOY, AKZA.AE) for $875 million in cash as the paints and chemicals supplier looks to boost its exposure in the region ahead of a recovering U.S. construction market.
The acquisition includes all Akzo Nobel's North American architectural coatings manufacturing and distribution facilities, about 600 company-owned paint stores, and product lines such as Glidden, Floor and Liquid Nails.
The business, which had 2011 revenue of about $1.5 billion, will give PPG a combined network of about 1,000 company-owned stores in North America. The acquisition also extends PPG's branded paint product offerings to more than 8,000 retail outlets and enhances its presence among independent paint dealers. PPG had 2011 sales of $14.9 billion.
PPG Chief Executive Charles E. Bunch characterized the deal as "an attractive way to significantly increase our scale in the North American architectural paint market, which we anticipate will benefit from a prolonged construction market recovery."
Shares of PPG climbed 5.4% to $132 in recent trading. The stock has risen 63% in the past twelve months.
The deal, which has been approved by the boards of both companies, is expected to close in the second quarter. PPG will also assume $175 million in debt related to Akzo Nobel's Canadian pension plans.
Akzo Nobel--a Dutch paints and coatings supplier--has been struggling with tough trading conditions in Europe and is shedding the paints unit after four years of losses and restructuring. Akzo Nobel wrote down the value of its paints assets by $3.25 billion in October.
U.S. Deco, as the Akzo Nobel unit is known, has been hit hard by the slump in the U.S. construction and housing market, struggling to compete with bigger U.S. rivals, such as PPG and Sherwin-Williams Co. (SHW).
Akzo Nobel originally acquired the business as part of its 2008 acquisition of U.K. chemicals company ICI. The unit contributed about 7% of Akzo Nobel's total 2011 revenue.
U.S. Deco "lacks critical mass and reaching the level needed would require significant funds and management attention," which Akzo Nobel isn't prepared to invest despite signs of a recovery of the U.S. housing market, Chief Executive Ton Buechner said. The company expects the division to break even at the operating level in 2012.
Akzo Nobel has said it will use the $875 million from the sale to pay down debt and invest in higher-growth markets. It plans to focus on Europe, but emphasized it continues to have a strong presence in North America through its performance coatings and specialty chemicals businesses, which had combined 2011 revenue of over $2.7 billion.
PPG executives acknowledged on the call that Akzo has struggled in North America, but they said the combined business will benefit from increased scale and distribution and it expects the unit to be a "solid cash generator."
To fully integrate the U.S. Deco unit, Mr. Bunch estimated the company would spend $100 million over the next few years. PPG expects to record net operating earnings of about $160 million for the acquired business over a three-year period.
PPG also said it will reinitiate its share repurchase program as soon as it finishes splitting off its commodity chemicals business, likely to happen in early 2013. The company expects to spend between $500 million and $750 million on share repurchases next year.
Laurence Alexander, an analyst at Jefferies, said the deal, along with the share buyback, will likely add 35 cents to 65 cents to the company's earnings in 2014.
--Robert Van Den Oever contributed to this article
Write to Saabira Chaudhuri at firstname.lastname@example.org
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