North of the Border

By Charles W. Thurston | August 11, 2005

Comex finalizes its deal to acquire Professional Paint.

Mexico's most powerful paint and coatings company, Consorcio Comex S.A. de C.V., finally has made a major play into the U.S. and Canadian markets through the purchase of Professional Paints Inc., of Lone Tree, CO, for an undisclosed sum (estimated to range upwards toward PPI's $500 million annual sales level). The deal, expected to close by late October or early November, will make Grupo Comex a $1 billion-a-year, 100-million-gallons-plus company positioned to challenge any of the international competitors active in its regional markets in North America.

"Since we already have a 54% share of the market in Mexico, to keep growing we have to go to other markets. With PPI, we can compete with the largest companies in North America," said Marcos Achar, the chief executive officer of family-held Comex, Mexico City. At the announcement of the deal, Achar said, "Comex is excited by the prospect of partnering with a proven company like PPI to create a company that can build significant share in the market from Canada to Panama."

According to Achar, Comex's annual sales are approximately $500 million, with profits of about $85 million. PPI's sales also will hit $500 million this year, though profits have not been forecast, according to Kent Child, chief executive officer of PPI.

Both companies will continue to operate on a relatively independent basis in the regions in which they are active, with the goal of applying best practices from each operation to the other, said Achar. "While we will retain the well-developed PPI brands, if one company has a product to offer the other, we can incorporate it through expansion of the existing brand lines," he added.

There will be substantial gains from the synergies between Comex and PPI. "We will take advantage of what strengths each company has," said Achar, "For example, Comex has a polymer research center in Mexico City, which can help PPI in product development. Comex also manufactures 80% of its resin consumption, while PPI buys resins."

"Conceptually, synergies also will come through the purchasing of raw materials and outsourced finished goods," Child added.

"Comex is a very good retailer, selling to over 3,000 concessionaires (or dealers) so they have a two-step distribution process, while we use one step. We both hope to learn best practices and apply them to both companies. We have no plans to outsource labor in either direction and we don't intend to rationalize production across the border," Child said.

Honing the Regional Strategy
The all-cash PPI purchase deal between Comex and the seller, buyout specialist Jordan Co. L.P., of New York, was the result of an auction of PPI, managed by Goldman, Sachs & Co. Other bidders were not disclosed, but one industry source suggested that majors such as PPG and Sherwin-Williams were likely to have considered a bid. The deal closely followed Sherwin-Williams' acquisition of regional paint companies Duron Inc. and Paint Sundry Brands Corp.

"The regional strategy has proven to be the right strategy," said Wes Walraven, managing director of Merrill Lynch Capital Markets' mergers and acquisitions department, in Los Angeles, CA. Merrill Lynch provided financial advice to Comex for the purchase, and also provided a senior bank line for the deal, including a revolver for working capital, he noted.

Prior to the acquisition, Comex had no debt. Achar quipped: "As my grandfather used to ask, 'Would you rather have a full stomach or a good night's sleep?'"

Comex had been watching the U.S. market for an acquisition for seven years, according to Achar. "None of the companies were large enough or were the right fit. PPI is a successful company with great management that has grown in North America, making its acquisitions work; they have a wonderful knowledge of each of their markets, and they don't compete in our markets," Achar said.

"Comex been looking for an acquisition for years, so they were prepared to be aggressive this time, because they understood competition and the dynamics of the (U.S. and Canadian) market," said Walraven.

Market analysts agree that the regional strategy is sound. "The Comex-PPI merger is setting a new direction for (cross-border) mergers, in that all previous activity has been U.S. companies picking up businesses in Mexico," observed Rodney Biddle, senior vice president at The Chemark Consulting Group, of Southern Pines, N.C., following the merger announcement. (Biddle has since returned to Reichhold Chemical.)

"The merged company will be a new major competitor and will probably begin to eat into share for companies like Kelly Moore that have been the traditional Southwest and West Coast players," Biddle said. "PPI has done an excellent job of retaining its individual companies' identities while taking advantage of their combined size and strength. I would assume that this strategy will continue in the new company and agree that this will be a new 'gorilla' ranging from Mexico to the western regions of the United States and Canada."

COMEX's Leadership
Comex is an 80-year-old vertically-developed manufacturer of resins, paints and coatings in all the major segments, with current production of 71 million gallons a year. Comex distributes its products through some 3,000 stores, most of which are operated as franchises or independently. The company operates five factories including its Tepexpan production center, and has a variety of business relationships and units.

Comex's strategic acquisition will help solidify PPI's long-term goals for growth in the North American market, according to Child. "Obviously the value of the deal for the PPI group is that it will give us long-term ownership. As a strategic buyer, Comex won't enter the transaction with an exit plan. So PPI finds a permanent home," Child said.

Above: Frazee's tank farm.

PPI has a broad product portfolio consisting primarily of architectural paints formulated for region-specific climates: "Every PPI company has been strategically positioned," said Child. "We focus on our businesses by region, and each has different competitors and different strategies," he said. "For example, we compete every day with Cloverdale in Canada, with Parker in Washington and with Rodda in Oregon. We also compete in every market with ICI and Benjamin Moore," he added.

According to Child, the diversity of markets in which it operates require specific manufacturing practices.

"We do our production in small plants formulated to the specific climates they are in: you don't use the same latex in Seattle as you do in Phoenix," Child said. "Our seven plants are all running at 65-70% capacity, so there is room for growth. In 2004 we will do 35 million gallons."

Approximately 85% of PPI's sales stem from contractors, through its network of seven or eight independent dealers and as many retail trade outlets. "In developing a market we first establish a sales base, then open a service center to help it grow," said Child. "We now have about 300 service centers, with about 70 of those in Canada." Geographically, PPI's strength in Canada has been from the West Coast eastward to Ontario. "The growth opportunity in Canada is Ontario," commented Child.

"In the U.S., we are active in and see growth opportunities in Northern California and Northern Arizona. We also are active in the Rocky Mountains and in the midwest; growth opportunities there are in Kansas City, Omaha and Oklahoma City. Our other key focus is Texas."

Enhanced Plans for PPI Growth
PPI's plan for further growth will continue-if not accelerate-under Comex ownership. "We have a four-point growth plan," Child said. "First, we will increase our share in the markets we service, and we already hold a first or second position in 80% of the markets we service," he added.

"We will enter new markets, generally adjacent to existing markets, with our direct sales forces and service centers. We have opened 20 service centers per year historically, and will continue to do so," Child added.

And don't expect PPI to stop shopping either.

"[We are] looking at regional paint manufacturers and/or dealers that give us access to new markets with a well-recognized brand name," Child said.

"The niche acquisitions also will involve independent dealers who have multiple units, which means that they are in secondary and tertiary (level) markets. Thus the secondary market players are candidates to sell out to us and covert to a company store carrying PPI products," he added.

"Our need for capital expenditure funds won't change at PPI, but we have plenty of resources, but now the need or desire for acquisitions will increase," Child noted.

Lastly, PPI will look to diversify. "By way of our Duckback exterior wood and concrete stains, we will gain more contractor exposure, in part through new product offerings," Child said. "Duckback now sells through distributors, but as such is not competitively priced for contractors. Now we will be giving Duckback direct access to contractors through the PPI network. We also will bring Duckback products into the existing distribution channel."

Charles Thurston is Coatings World's Latin American correspondent. Last month he covered the Rodda Paint-Cloverdale merger.

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