2005 M&A Update

By Stephen Einhorn & Jackie Christiansen | February 9, 2006

Marked by increases in raw material costs, 2005 was a quiet year for mergers and acquisitions.

Last year was a relatively quiet year for mergers and acquisitions in the U.S. paint industry. According to our records there were 13 paint transactions in the U.S. during 2005, compared to 16 in 2004 and 21 in 2003. This slow-down is the result of consolidation, which has reduced the number of desirable paint companies available for acquisition, the rapid increase in raw material costs, and the tendency for buyers to be just a bit more cautious than in years past. One would expect that as consolidations continue and the aggregate number of firms continue to decrease, there will be a decline in the number of transactions.

For 2005, a large transaction was medium in size. Medium-sized transactions included the acquisition of Samuel Cabot by Valspar and the sale of Iowa Paint to PPG. Samuel Cabot was an "old-time" familyowned paint business. This acquisition strengthened Valspar's product lines and will enable Valspar to expand the number of sku's it sells to its trade sale paint customers. The acquisition of Iowa Paint by PPG expanded PPG's ability to service professional paint contractors in the Midwest and includes Iowa Paint's 42 locations within eight Midwestern states.

RPM continued its consistent record of growth by acquisition through two coatings transactions in 2005. RPM's Carboline subsidiary acquired AD Fire Protection Systems, with sales around $16 million, in June. AD Fire is a leading manufacturer of architectural fireproofing materials, including water-based intumescent coatings and heavy weight cementitious fireproofing. The product lines complement Carboline's for the commercial fireproofing market with its offerings for applications in industrial markets. In July, RPM's Zinsser division acquired OKON from Rentech. OKON's technology for water-based sealing coatings for concrete, masonry and wood was attractive to RPM. Joe Lee, director of corporate development has stated that there is "reasonable activity, yet some of the pricing appears to be unreasonably high."

Another technology transaction was the acquisition of Actinic by Northwest Coatings. Actinic is a manufacturer of UV and EB curable coatings for the graphic arts and industrial markets. The two firms will be collaborating on technical products to enhance product quality and customer service.

Gardner Asphalt was also active in acquisitions during 2005. In March, Gardner acquired Fields Company, a compatible manufacturer of roofing and waterproofing materials. This acquisition was made to increase the product offerings of Gardner and to expand manufacturing in the Northwest U.S. A few months earlier, Gardner had also acquired the ArmorFlex Roof restoration System from Honeywell and the product manufacturing business of Kold King Roofing Systems.

The trend of consolidating the facilities of the seller with an existing buyer facility continues. Examples include the acquisition of Foxcolor by Quest Specialty Chemicals, where the business was integrated into the manufacturing operations of Quest, and the RPM/Okon transaction where Okon's manufacturing operations will be transferred to a Zinsser plant.

The rampaging increase in raw materials also prevented a number of transactions from occurring because a number of sellers were unable to maintain their margins and realized that they probably would not be able to achieve the values they wanted within the marketplace. Rather than negotiate under these conditions, the owners have temporarily pulled their businesses off the market.

Europe looks east

The U.S. acquisition market was noticeably silent in terms of European participation as the major European firms have shifted their focus eastward toward the Baltic states, Russia and Central Europe. Also, a number of major coatings companies which have a large OEM customer base are concentrating their efforts in developing their manufacturing and distribution facilities in China where much equipment is now being manufactured. China and the Far East have also been able to increase their sale of raw materials into the U.S. This trend has resulted in decreased U.S. margins for a number of domestic raw material suppliers.

The year ahead

We expect that during 2006, the paint industry will recover the margin that it lost during 2005. We believe that buyers will remain cautious about acquisitions because the marketplace for most coatings segments is growing slowly and buyers are very concerned about returns on investment and potential overpayment. The demand for quality paint firms with good margins and growth and/or technology will continue. Smaller and unprofitable paint companies will increasinlgy find it more difficult to achieve reasonable values. The year 2005 was a tough year for much of the paint industry, but as the saying goes, "We learn some things from prosperity, but we learn many more from adversity." CW

Stephen Einhorn is president and Jackie Christiansen is vice president of Einhorn Associates, Inc., Milwaukee, WI, where they have specialized in paint and coating's mergers and acquisitions for many years. They can be contacted at einhorn@einhornassociates.com.