M&A stirs up market.(Paints & Coatings)(Cover story)(Company overview)

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Akzo Nobel's planned 8.1-billion [pounds sterling] ($16.1 billion) acquisition of ICI has created a shakeup in the paints and coatings industry, in which the 11-largest companies currently command 53% of the $76-billion global market. The acquisition will significantly expand Akzo's footprint into high-growth regions and further widen the gap in market share between Akzo, the global leader, and its rivals. Those rivals, in particular, face new challenges involving how to remain competitive when consolidation is drying up the once-sizable pool of acquisition candidates, analysts say.

"The Akzo-ICI play has enormous ramifications" for the industry, says Phil Phillips, managing partner and president of Chemark Consulting Group (Southern Pines, NC). It creates an "awkward chess match" in which the majors are "feeling the pressure to make countermoves [including acquisitions] to secure their positions," Phillips says.

Major paintmakers in recent years have focused on acquiring mid-size paintmakers, or those with sales in the $100-millionto-$300-million/year range, Phillips says. However, paints and coatings M&A has been so strong that this target group is nearly depleted, with only a few remaining in the industrialized regions of the world, he says.

That has left major paintmakers largely pursuing smaller firms, which may not deliver much of an impact on their bottom lines, or niche firms that bring a specialized technology or product line to the acquirer, analysts say. The major players are expected to continue following this strategy for growth, though it is not likely to be enough in light of the magnitude of the Akzo-ICI deal, analysts say.

The Akzo-ICI deal is expected to close by year-end. Akzo commands a 9% market share in the global market, and PPG Industries closely follows with an 8% share (top chart, p. 25). An Akzo-ICI combination will account for 15% of the market, Phillips says. The deal also significantly boosts Akzo's share of the $25-billion global architectural market to 21%, from 2%, and strengthens its geographical presence into high-growth markets (bottom chart, p. 25).

However, Akzo's bid for ICI may face opposition from major blocks of stockholders and/or from antitrust regulators, analysts say (CW, Aug. 15/22, p. 6). Akzo may be forced to divest one of its brands to take on ICI's Dulux line, Phillips says. "It's a competitive restraint if they combine the two." ICI's Dulux brand accounts for 40% of the European architectural paints market, he says.

Meanwhile, Akzo's coatings division reported second-quarter sales up 8%, to 1,775 million [euro] ($2,499 million), from the year-ago period. Sales were driven by Europe, emerging markets, and acquisitions, Akzo says. The firm's decorative coatings, and marine and protective coatings units posted double-digit revenue growth, while powder coatings increased its global presence with the opening of new plants in Russia and China, Akzo says. Industrial activities also performed well, although weakness in the U.S. housing market affected wood coatings, the firm says.

ICI reported second-quarter paints sales up 2%, to 632 million [pounds sterling]. Paint sales increased 18% in Asia, 3% in Europe, and 16% in Latin America. …