August 10, 2017    4 minute read

Akzo Nobel vs PPG: Contrarian Perspectives

Turning the Tables    August 10, 2017    4 minute read

Akzo Nobel vs PPG: Contrarian Perspectives

Some light has been shed on the Akzo Nobel vs PPG takeover battle and the role of an aggressive hedge fund, named Elliott Advisors, in this battle. Akzo Nobel executed defensive tactics which led to PPG’s bid withdrawal. It seems Akzo’s defense-oriented legal structure shield was strong enough to stand against the American shareholder-minded corporations, like PPG and Elliott.

Eventually, Elliott accused Akzo’s chairman of the supervisory board Antony Burgmans for having too much of a negative influence on the takeover discussions that were going on between Akzo and PPG. Akzo was dismissive of PPG and Burgmans is accused of being the main person behind this bid withdrawal outcome. The plaintiff, Elliott, is contending against the defendant, Akzo, and hopes that a forced resignation will be the outcome of the court case on August 10.

This favourable outcome for Elliott probably results in re-bidding chances – which means that the PPG Akzo takeover battle is re-opened and shareholders can decide to accept PPG’s offer – where PPG is more likely to make an attractive offer that Akzo’s board of directors, the supervisory board, and the shareholders are more able to accept.

But what if the situation was reversed? Why doesn’t Akzo Nobel bid on PPG? This article analyses the perspectives to the contrary. It would be interesting to look at both sides of the coin before receiving the official verdict.

Akzo Should Buy PPG

According to Ken Fisher, a distinguished investor worth $4bn, Akzo should acquire PPG instead. This is often called the Pac-Man strategy, where the former target takes over the former acquirer.

The famous investor suggested that Akzo borrow funds for the acquisition of either PPG or Sherwin-Williams. This move will pay off immediately for the firm and its applicable shareholders because the profitability of the aforementioned acquirees is higher than the interest costs paid on debt. This would cause the earnings per share to rise.

Moreover, an acquisition of either PPG or Sherwin-Williams could prove beneficial, as these companies are similar in terms of core businesses. Both companies are active in the painting market. Dutch shareholders should encourage Akzo to aggressively respond, especially when current conditions are analysed. PPG would have little choice but to accept Akzo’s bid in case an aggressive move is made since PPG has no dominant shareholders that influence the company.

Furthermore, there is no protection in the United States that is similar to the one that finally protected Akzo. Dutch law states that an acquirer must have a cooling off period of six months in case a final offer is refused. Moreover, Akzo is legally structured around the stakeholder principle that is about long-term value creation for the company and its surrounding parties. This will potentially result in a beneficial outcome for Akzo as a company and for its shareholders.

Further Reflecting on Akzo Q2 results

Last Monday, Barclays published their latest analysis regarding Akzo. The investment bank indicated that, besides Akzo’s disappointing margins, the Specialty Chemicals division that Akzo would like to list on the stock exchange should be valued at €7.3bn. This is lower than the initial €8-12bn range that was expected before. Barclays indicated it was more pessimistic, as Akzo mentioned a 4% volume growth target per year, while this sector is known for its flat rate in the past decade.

However, it seems shareholders hope for a re-bid later this year because share price appreciation has been present in the market, while Q2 figures were generally disappointing. Relatively, the bank slightly upgraded their 12-months price target to €62 per share.

Nevertheless, the latest share price of €75.99 is slightly lower compared to the €76.17 in the article written about Akzo on August 1st, as can be seen from the graph below.

6-month share price movement Akzo Nobel N.V. Source: Market Watch

A price target of €62 results in a 22.56% downward potential at the time of writing this article. Barclays assumes that the share price will rise if shareholders expect a re-opening of the takeover process later this year.

Furthermore, Barclays questions Akzo’s future performance, because of the euro that is getting stronger. The majority of Akzo’s business is in non-EU countries. Therefore, the company is highly dependent on the euro movement. A strengthened euro results in a minimization of euro’s received when foreign currencies are flowing back to The Netherlands, where the company is based, at the moment.

Conclusion

In short, multiple scenarios are likely in the Akzo-PPG-Elliott battle during the coming months, with a probable high impact on Akzo’s share price. The outcome of the court case will paint a clearer picture on where Akzo is heading as a company. Is it possible that Akzo will place a takeover bid on PPG, if Elliott has a positive court case outcome? More information and perspectives will be visible right after the court case.

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