The tussle between AkzoNobel, PPG Industries and Hempel regarding the takeover of Finland’s Tikkurila is an indication there could be more acquisition battles in the European coatings sector over the next 1-2 years.

The three companies made takeover offers within a few weeks of each other in December-January for the Finnish decorative and industrial coatings producer which is a leading decorative player in Scandinavia, northeastern Europe and Russia.

After PPG made the first bid in December, offers were placed by Hempel and then AkzoNobel in January.

The Dutch-based multinational seemed at that stage to be emerging as the winner of the contest after putting in a bid worth a total value of €1.4 billion ($1.7 billion) against a PPG offer worth €1.2 billion.

But whatever the outcome, the three-way battle showed coatings, as well as other sectors in Europe, were entering a period of consolidation and reconstruction in the wake of the COVID-19 pandemic.

By January 2021, the cumulative total of cases of the disease in Europe was around 20 million with a death toll of 500,000.

As a result of both the health crisis and its accompanying economic recession, numerous companies were struggling financially with a choice of either going bankrupt or being acquired.

Others were in need of funds that would be available only through a takeover.

For potential predators, the post-COVID period could provide opportunities for building through the acquisition of stronger defensive positions in markets.

It will be a chance to expand into segments where they perceive they lack a geographic presence or have gaps in their portfolios due to technological weaknesses.

A lot of the coatings companies with plenty of cash for takeovers tend to be those with highly profitable decorative paints businesses that have done well during COVID.

In Europe, there has been an increased demand for decorative paints, particularly through online purchases during COVID-19.

In some countries, there has been a DIY boom with consumers wanting to use lockdowns as an opportunity to smarten up their own homes.

Decorative paint producers have been able to take advantage of the strong demand to maintain or increase sales prices while benefitting from lower raw material prices and a squeeze on costs.

In the third quarter of last year, AkzoNobel increased sales margins for decorative paints to 21 percent compared with 14 percent in the same period in the previous year.

In the first nine months of 2020, the company’s return on sales (ROS) in decorative paints went up to close to 17 percent from 12 percent in the first three quarters of 2019.

In surveys of M&A strategies among companies with healthy balance sheets in Europe senior executives have been telling analysts that their objective is a balanced approach combining acquisitions with divestments.

In coatings and most other sectors, it seems mega-deals like that attempted by PPG in a $26 billion bid in 2017 to acquire AkzoNobel will be rare events. Instead $2-3 billion deals, perhaps with a few exceptions, could be the upper limit.

PPG has been expanding its decorative-paints activities in Europe with the help of takeovers of leading local brands and regional supply chain operators.

A major attraction of Tikkurila ownership to PPG is the Finnish company’s well-established distribution network across the Nordic region.

AkzoNobel’s chief executive Thierry Vanlancker made clear to analysts at its annual results conference in Amsterdam in February 2020 that its main interest with future M&As were “add-ons” rather than big deals.

In October last year, it acquired the decorative paints business of Spain’s Industrias Titan which, like with Tikkurila, is a well-known regional brand with a strong reputation for sustainability.

Hempel, a Danish-based privately owned coatings company, has only relatively recently emerged as a significant player in the European decorative paints sector with expertise in private label paints.

It has recently set up a business unit Decorative Europe after acquiring the only private-label paints specialist in Europe J.W. Ostendorf of Germany and its French subsidiary Renaulac in 2018 and combining it with UK-based Crown Paints which it took over in 2011.

“When the world closed down in 2020 [because of COVID-19] and global operations including ours were challenged, we sped up our strategy process,” said Lars Petersson, group president and CEO, in a statement in January.

“Now we have laid the foundation for not only doubling our revenue but also for significantly increasing our positive impact for our customers, partners and employees. We will build leadership positions and invest in our core segments and put sustainability at the heart of how we do business.”

The company aims to achieve 50 percent revenue growth through M&As with market leadership positions in its four main segments of decorative, marine, infrastructure and energy, compared to less than 10 percent today. 

“We have been spread too thin and too shallow and therefore we focus our business by exiting some geographies by our own operation and strengthening others,” Petersson added.

If AkzoNobel’s bid for Tikkurila is successful, Hempel has agreed to buy certain assets including the decorative paints business of AkzoNobel in the Nordics and the Baltics.

This will help AkzoNobel avoid anti-trust difficulties with European Union and national competition authorities.

A major driving force behind M&As in coatings and the rest of the specialty chemicals sector in Europe has been their relatively high stock market valuations.

Coatings companies’ valuations in terms of multiples of their EBITDA – earnings before interest, taxes, depreciation and amortization – has been around 50-60 percent higher than those for commodity chemical businesses even in COVID-afflicted 2020, according to figures from the Valence Group, a New York and London-based investment specialist in chemicals M&As. 

This gap is likely to widen during the COVID-19 recovery period.

This will please private equity firms that have been particularly active in coatings M&As in recent years.

One uncertainty for coatings producers with thriving decorative businesses looking for opportunities for takeover expansions is how much enthusiasm for DIY fades once COVID-19 recedes to the background and what impact that will have on the decorative segment’s profitability.