M&A: 2003 in Review

By Stephen Einhorn | August 11, 2005

2003 was a steady year in terms of mergers and acquisitions in the North American paint market, with buyers aggressively seeking synergies.

Although the number of transactions increased in 2003 (21 transactions) over 2002 (14 transactions), all things considered, 2003 was an unremarkable year for paint and coatings transactions.

Of the transactions that took place, 12 involved architectural paint companies. These transactions often included consolidating the acquired businesses into the buyer's facilities, thus closing many of the seller's facilities and immediately boosting profits of the acquired businesses. Some acquisitions were driven by the desire to enter and/or further expand regional geographic markets. From our experience, multiples for companies were a bit higher than in 2002, and buyers were more aggressive in obtaining synergies.

It's all about Synergy
The majority of acquisitions and divestitures during 2003 were synergistic transactions of product lines, divisions or business segments. This is illustrated by the acquisition of Sterling Paint by Iowa Paint Manufacturing, which gave Iowa Paint entrance into the Arkansas market and further market penetration throughout Missouri, and ICI's acquisitions of Hancock in the Northeast and eight Wilshire Paint stores in California.

The acquisition of Arizona-based Classic Paint by Professional Paint, Inc.'s. (PPI) Frazee subsidiary was consistent with PPI's goal to expand its regional markets with new brands and outlets. Regarding the Ideal acquisition, Kent Child, president of PPI, indicated that the acquisition is also synergistic with its General Paint business from a manufacturing and distribution standpoint. The purchase included four service center locations in Ontario, Canada and the Ideal Paints brand name.

Production Consolidation
Production consolidation also took place during 2003. Examples include Agate Lacquer where manufacturing was moved to a larger facility owned by the buyer, Jema-American, and Diamond Vogel's acquisition of certain assets associated with a portion of the industrial coatings business of Davis-Frost, where manufacturing at the Minneapolis facility of Davis-Frost was consolidated into Diamond Vogel's Minneapolis facility; the Davis-Frost Tulsa production was retained.

The acquisition of Futura Coatings, a firm that specializes in urethane related coatings, by ITW represented a more complicated consolidation acquisition. Our firm, in negotiating the sale, recognized the buyer's concern that there was a unique environmental problem at the seller's facility. Under these circumstances, the transition in production from seller to buyer became quite a challenge.

To accommodate the environmental issues at the existing seller's facility, the buyer purchased several months of inventory [which was manufactured prior to the closing of the transaction] since the buyer was not willing to manufacture at the facility for even one day.

Active Buyers: RPM and PPI
Two of the most active acquirers during 2003 were PPI and RPM. Professional Paint's acquisitions included Ideal Paints, Classic Paints and Duckback Products, a manufacturer of wood and concrete stains operating in Chico, CA.

Classic Paint was geographically attractive to PPI due to a desire to increase its Frazee business outside of California. Duckback Products was acquired to diversify PPI's business. Acquiring Duckback gives PPI the "opportunity to sell ultimately through the DIY marketplace," said Child.

RPM added approximately $70 million in revenues through acquisition in their latest fiscal year.

Many of these transactions were "bolt-on acquisitions for existing businesses" according to RPM's Joe Lee, director of corporate development. The deals were very much representative of RPM's strategy. RPM's Zinsser Company purchased the assets of Parks Corporation, a manufacturer of wood and floor finishes, paint removers and related products, which was operating in a particularly difficult environment. In this acquisition, RPM retained the two facilities which were required to maintain RPM's production and distribution capabilities. In addition, RPM's Tremco division acquired Koch Waterproofing Solutions, a manufacturer of membranes and coatings systems that provide moisture protection. The company has been renamed Tremco Barrier Solutions and provides Tremco with established brands and the potential for market and technology expansion. Also in 2003, RPM acquired Triarch, which will be operated under the Dryvit Systems segment of RPM.

Possibly the most exciting 2003 transaction-and one our firm worked on-was the acquisition of Para by Sico. Para was a leading Canadian architectural paint firm, and the transaction more than doubled Sico's sales within the Ontario market. As a result of this acquisition, Sico became the largest manufacturer of paint and coatings in Canada. The announced price was about $43 million (Canadian). Canadian currency, like the Euro, has strengthened, making the purchase price 15% more in U.S. dollars than it would have been one year ago.

Why Buy?
Companies making purchases in 2003 did so for a variety of reasons: entry into new markets, diversification of product lines, new manufacturing facilities, added retail units and more.
Seller/Brand/Property Buyer Goal
Agate Lacquer Jema-America Manufacturing facility.
Classic Paint PPI (Frazee) Expansion into regional markets; synergy manufacturing and distribution activities of General Paint
Davis-Frost's assets Diamond-Vogel Production consolidation
from its industrial operations
Duckback Products PPI Diversification, entrance to DIY
Futura Coatings ITW Product expansion
Hancock Paint stores ICI Additional stores in the Northeast region of the U.S.
Koch Waterproofing RPM (Tremco) Established brands, technology expansion
Para Paints Sico Doubled sales in Ontario
Parks Corp. RPM (Zinsser) Facilities
Sterling Paint Iowa Paint Mfg. Entrance into the Arkansas market, increased presence in Missouri
Wilshire Paint stores ICI Stores in California

Specialty Acquisitions
In addition to the trade sales companies we've mentioned, there were several acquisitions of specialty coatings companies. This list includes The Magni Group's acquisition of GDCS Coating Technology, a manufacturer of coatings for brake drums and rotors, exhaust systems and mufflers, and the purchase of E/M Coatings, a manufacturer of solid film lubricant coatings by Curtiss-Wright. Another acquisition that our firm worked on was Xymax's acquisition of Wattyl's Wasser business, which enhanced Xymax's market share in moisture-cured urethane coatings.

While 2003 proved a fairly unremarkable year for paint and coatings transactions, it was encouraging to see an upswing in the number of transactions completed as well as the multiples that were paid for companies. We believe that in the coming year, good companies will continue to sell at reasonable but steady multiples, and that the number of transactions completed will continue to grow.

We believe that the final portion of 2004 will generate renewed inflation. Inflation tends to increase capitalization rates and decrease values of businesses. For this reason we predict that market values will be somewhat lower in 2005 than during 2004.

About the author:
Stephen Einhorn is founder and president of Einhorn Associates, a Milwaukee, WI-based consulting firm specializing in mergers and acquisitions in paint and coatings. Arlene Spanier and Jacky Christiansen contributed to this article.

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