Here’s What To Do About Sherwin-Williams Co (SHW)’s Acquisition of The Valspar Corp (VAL)

Valspar Overview

The Valspar Corp (NYSE:VAL) had a market cap of ~$5.3 billion before the acquisition.  Valspar has a long history of dividend increases (like Sherwin-Williams). The company has increased its dividend payments every year since 1992.

Compared to Sherwin-Williams, Valspar is less popular among the smart money investors followed by Insider Monkey. A total of 15 funds reported stakes worth $670.50 million as of the end of 2015, versus 19 funds with $531.03 million worth of stock a quarter earlier. Among these funds, David Cohen and Harold Levy’s Iridian Asset Management is the top shareholder of Valspar, owning 4.80 million shares.

Valspar operates in 2 segments:

– Coatings

– Paints

The Coatings segment generates 70% of the company’s EBITDA in fiscal 2015. The Paints segment generated 30% of the company’s EBITDA in the same year.

The image below further summarizes Valspar’s business:

Source:  Sherwin-Williams’ Valspar Acquisition Presentation, slide 4

Impact of Acquisition on Sherwin-Williams

The acquisition of The Valspar Corp (NYSE:VAL) will vault Sherwin-Williams to the #1 position in the global coatings industry.  The acquisition will very likely reach approval as it in no way creates a monopoly in the industry.

Source:  Sherwin-Williams’ Valspar Acquisition Presentation, slide 4

The acquisition will be especially impactful for Sherwin-Williams international operations. The company’s percentage of revenue generated internationally will increase substantially.

– 16% of company revenue generated internationally before acquisition

– 24% of company revenue generated internationally after acquisition

A large acquisition would not be complete without potential synergy talk. The Sherwin-Williams/Valspar deal is no exception.

Sherwin-Williams expects to realize $280 million in annual synergies by 2018. The company expects fully realized synergies to be around $320 million a year. Nearly 90% of synergy benefits will come from selling, general, and administrative expenses as well as from reductions in raw material costs.

The overall impact of the acquisition will be positive for Sherwin-Williams. The company believes the deal will be immediately accretive to earnings-per-share (not counting acquisition costs).

The deal makes strategic sense as it gives Sherwin-Williams’ international operations a ‘jump start’. The deal also increases the size and scale of Sherwin-Williams’ operations which will likely result in higher margins through greater economies of scale.