Interview: Uncertainty not good for transactions

Ben Scharff, Managing Director, Grace Matthews on the developments of the market over the past twelve months.

Ben Scharff is cautiously optimistic for the remainder of 2022. Source: Grace Matthews

How have merger and acquisition activities in the paint and coatings industry developed recently (mid-2021 to today)?
Ben Scharff: The M&A markets remain robust. There is an ever-increasing void of middle market players in paints and coatings. As such, due to this scarcity, independent players in this space are getting a lot of attention. Private equity is trying to fill the gap by acquiring platforms and investing heavily in them to grow organically and through acquisition. Also, being mindful of this scarcity, large players are looking inward as to how and when they should parse out non-core assets. This is leading to an increasing level of activity in carve out transactions coming to market.

To what extent has the Covid pandemic affected M&A activities in the paint and coatings industry?
Scharff: As previously noted, the issues around Covid reinforced some of the themes we’ve been seeing for a while now, especially the benefits of scale. Another item of note is the ability work efficiently from remote locations. This has expanded the search for new talent in organizations outside of their backyard to pursuing talent globally. Similarly in transactions, while it is also beneficial to navigate issues face-to-face, the deal-making community has become more adept at maintaining process speed from afar.

Read the full analysis by Ben Scharff which is available online.

The world is now facing further challenges, such as the supply chain issues and the war in the Ukraine. How will these situations affect M&A activities in the paint and coatings industry?
Scharff: Uncertainty tends not to be good for transactions. Supply chain issues and the war in Ukraine both certainly cloud the outlook for many companies as they attempt to forecast the balance of 2022 and into 2023. You’d be challenged to pick up an industry trade magazine over the past 12 months and not read about supply chain disruption. China’s zero-Covid policy only exacerbates this issue. An example of this is Akzo Nobel recently downgrading their second quarter earnings expectations largely due to sourcing issues with China. Companies pulling operations out of Russia and those reliant on Russian oil are meaningfully impacted by these events. To lessen this impact, some countries, such as Germany, Austria and The Netherlands, have recently stated that they will be bringing coal-fired plants back online to meet energy demands.

How do you rate the ongoing consolidation in the paint and coatings industry?
Scharff: We are definitely in the latter stages of consolidation for paints and coatings. There has already been a heavy level of consolidation in this space, especially in Europe and North America. All of the large players continue to be active in M&A, and all are now also looking inward as to how best to optimize their portfolio of assets. As previously mentioned, this is leading to an increased level of carve-out transactions – as they look to optimize and redeploy capital in areas deemed more value-add. These carve-out transactions are helping to fill the void of deal flow activity in the space.

Which consolidation scenarios do you consider to be likely?
Scharff: Similar to Sherwin Williams’ recent acquisition of Specialty Polymers, I think we will see more companies looking at their supply chain and assess the benefits of trying to shore that up. It can be tricky to move upstream, however it can prove beneficial if done thoughtfully and selectively. As it relates to large targets in the market, I think you would have to continue to look at Axalta and whether one of the large coatings players has an appetite to take a run (or another run) at it. However, 2022 may be the year to play it safe.

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