Sherwin-Williams, Valspar Ink Divesture Deal With Axalta

Paint makers, Sherwin-Williams Company (NYSE:SHW) and Valspar Corp. (NYSE:VAL) have entered into a definitive agreement with Axalta Coating Systems (NYSE:AXTA) to divest Valspar's North American Industrial Wood Coatings business assets to Axalta for $420 million in cash.

Valspar is a leading provider of coatings for the industrial wood markets like cabinets, furniture, building and other OEM (original equipment manufacturer) in North America. According to Gary E. Hendrickson, Chairman and CEO of Valspar, Axalta’s strong cultural fit, commitment to innovation and customer service will provide great opportunities for their employees. The companies will be working closely to ensure smooth business transition.

Sherwin-Williams, in Mar 2016, agreed to acquire Valspar, in an all-cash deal which is valued at around $11.3 billion. Valspar's shareholders voted in favor of the deal at the company’s Special Meeting of Shareholders held in Jun 2016. The merger would create a premier global paints and coatings company with strong foothold across Asia-Pacific and Europe, the Middle East and Africa (EMEA) regions.

In Jan 2017, Sherwin-Williams said that it expects divestiture will be required to gain approval from regulatory bodies for completion of the Valspar acquisition. However, the company last month said that it no longer believes the required divestiture to be completed by the end of April 2017. As a result, the termination date of the proposed merger has been extended to Jun 21 from Mar 21.

The companies are divesting the business to Axalta in regard to reviews by the Canadian Competition Bureau (CCB) and Federal Trade Commission (FTC) for the planned merger. The extension provides sufficient time to complete the merger by addressing necessary regulatory concerns.

According to John G. Morikis, Chairman, President and CEO of Sherwin-Williams, the company can now move ahead to obtain the necessary approvals for acquiring Valspar as the latest divestiture addresses regulatory concerns appropriately.

Sherwin-Williams’ shares gained around 9.8%, partly driven by strength in its Paint Stores Group unit, in the past three months, outperforming the Zacks categorized Paints & Allied Products industry’s gain of 6.6%.

The company follows a method of growing through acquisitions which enables to reduce its dependency upon prevailing market conditions. The planned merger with Valspar is expected to create around $280 million in annual synergies within two years of the closure of the deal. Also, aggressive cost control initiatives, working capital reductions, supply chain optimization and productivity improvement should continue to yield margin benefits.

Sherwin-Williams currently carries a Zacks Rank #2 (Buy).

A better-ranked stock in the basic materials space is United States Steel Corporation (NYSE:X) , sporting a Zacks Rank #1 (Strong Buy). It has an expected long-term earnings growth of 8%. You can see the complete list of today’s Zacks #1 Rank stocks here.

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