Acquisitions: “We expect to see a high level of carve-out activity”
How have merger and acquisition activities in the paint and coatings industry developed recently?
Ben Scharff: 2021 was a very strong year in M&A activity for the chemicals and coatings industries, which peaked in deal activity the back half of the year. Starting in 2022 we witnessed a softening in M&A activity that persisted into Q1 of 2023 with five straight quarters of lower deal volumes over the same quarter of the prior year. Across chemicals, deal volumes were down roughly 25 % in 2022 versus 2021 (901 reported transactions vs 1,210).
Activity in paints, coatings, resins and polymers were off closer to 35 % year-over-year. Anecdotally, we are sensing an increase in activity coming into the second quarter of 2023 and hope to see this continue to build throughout the year. Grace Matthews announced 7 chemical transactions in the first half of 2023, with 3 of them in paints and coatings. We advised Netherlands-based Stahl on its acquisition of ICP’s Industrial Solutions Business, Rudd Company on its sale to Gemini Coatings, as well Sherwin-Williams on the sale of its Menomonee Falls aerosol operations to Diamond Vogel.
Geopolitical and economic uncertainties remain globally. How will this situation affect M&A activities in the paint and coatings industry?
Scharff: This is clearly top-of-mind for both buyers and sellers in the market today. There has been a lot for business owners to manage through of late – supply chain disruptions, recessionary concerns, inflation and rising interest rates, banking concerns, inventory stocking and destocking, as well as geopolitical uncertainty and conflicts. While revenue may be up in for some of the major players in the coatings space (due to inflation and resulting price increases), most have seen a softening in demand and volumes over the past six months.
This, coupled with the geopolitical and macroeconomic uncertainties, does have a negative impact on M&A appetite, specifically for large, transformational M&A transactions. Having said that though, we have certainly seen resilience in smaller, safer transactions (sub-EUR 30 million of EBITDA). On the smaller end, both strategics and private equity have been able to effectively compete, as financing has been more readily available, and both continue to drive healthy transaction values.
How do you rate the ongoing consolidation in the global paint and coatings industry – and Europe in particular?
Scharff: Globally, the paint and coatings market has been heavily consolidated over the past 20 years. Europe tends to have more fragmentation and opportunities than in North America. Over the past few years, the North American and Asian coatings companies have focused heavily on M&A efforts throughout Europe.
Europe is suffering from high inflation and an “energy crisis”. To what extent are European companies more likely to be a target for buyers/investors coming from other regions?
Scharff: Our expectation is that we won’t see a meaningful change in cross-border activity. Europe has been a keen focus already for most of the major coatings companies. Buyers tend to be opportunistic and will pursue where best to place capital, but at the same time we think buyers will be more cautious in the near-term in looking at European assets. Ultimately buyers looking to make acquisitions in Europe will largely be for traditional business reasons – expand sales geography, extend manufacturing footprint, accelerate REACH compliance, add key products, personnel, etc. We have heard from many of the leading US chemical and coatings players of their strong desire to pursue acquisitions in Europe. This has been consistent with “pre-crisis” discussions. At the same time, we are also seeing meaningful interest from European buyers looking to deploy capital into other geographies, such as North America. Overall, we feel as though cross-border M&A will remain a strategic focus for most buyers and continue at the same cadence we have seen in the past few years.
What is your outlook for M&A activities in the paint and coatings industry until the end of 2023/beginning of 2024?
Scharff: While we are mindful of the increasing global unease, and that another major event could certainly extend the recent slowdown, we remain guardedly optimistic that the recent strengthening in M&A activity will continue to take shape over the balance of 2023 and into 2024. We will continue to see a flight to quality in the market. Whereby businesses exhibiting strong performance in volume, revenue and margin sustainability, will garner significant attention in M&A processes.
We will continue to see significant diligence scrutiny as sellers look to justify “normalized performance levels” while their historical financials reflect the choppiness of recent market activities. We expect that buyers will continue to focus on smaller, strategic deals while displaying extreme caution in pursuing larger, transformational transactions. Lastly, we expect to see a high level of carve-out activity as large players continue to take a portfolio-approach to managing their business and being quicker to bring-to-market certain assets that don’t fit their core strategy.