THOUGHTS ON COATINGS AND CHEMICALS M&A 2018 - JOHN BEAGLE CEO AND CO-FOUNDER GRACE MATTHEWS, INC.
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JOHN BEAGLE
THOUGHTS ON COATINGS AND CEO AND CO-FOUNDER
CHEMICALS M&A - 2018 GRACE MATTHEWS, INC.
ACA FALL COMMITTEE MEETINGS
SCOTTSDALE, AZ
OCTOBER 2018
WHEN ELEPHANTS FIGHT…..
“The worst place to be is in
the middle. When
elephants fight, the grass
gets trampled….”
-- Andrew Vachss
2
TODAY’S TOPICS
The Baseline: 2001 to 2018
Strategy & Shareholders
Building Products: The New Paint?
Priced to Perfection: M&A in 2018
3
BASELINE: 2001
George W. Bush becomes the 43rd president
9/11 Terror attacks on NY, DC and PA
US invades Afghanistan
Wikipedia goes online
Apple released the iPod
Average cost of gas: $1.46/gallon
Enron files for Chapter 11
DJIA on Dec 31, 2001: 10,021
Song of the Year: “Beautiful Day” by U2
Friends is the #1 TV Show
“Gladiator” wins Best Picture
Tom Sullivan and Tom Osborne are Chair and
Vice Chair of the NPCA
Grace Matthews forms dedicated chemicals group
And, the paint industry looked like…….
4
TOP 50 NORTH AMERICAN COATINGS COMPANIES, 2001
Rank Company Coatings Sales Rank Company Coatings Sales
1 The Sherwin-Williams Co. $3,722,000,000 26 H.B. Fuller Co., Global Coatings Div. $90,000,000
2 PPG Industries Inc. $3,088,000,000 27 Yenkin-Majestic Paint Corp. $90,000,000
3 Valspar Corp. $1,500,000,000 28 Spraylat Corp. $90,000,000
4 ICI Paints North America $1,350,000,000 29 Tnemec Co. Inc. $85,000,000
5 DuPont Performance Coatings $1,300,000,000 30 Jones-Blair Co. $80,000,000
6 RPM Inc. $1,120,000,000 31 Coronado Paint Co. $75,000,000
7 Akzo Nobel Coatings $900,000,000 32 Cloverdale Paint $65,000,000
8 Benjamin Moore & Co. $800,000,000 33 Smiland Paint Co. $65,000,000
9 Behr Process Corp. $730,000,000 34 Rodda Paint Co. $65,000,000
10 BASF Coatings $692,000,000 35 LaFarge Road Marking $61,000,000
11 Professional Paint Inc. $357,000,000 36 Chemcraft International $60,000,000
12 Kelly-Moore Paint Co. Inc. $323,000,000 37 Willamette Valley Co. $60,000,000
13 Duron Inc. $280,000,000 38 Vista Paints $55,000,000
14 Dunn-Edwards Corp. $240,000,000 39 INSL-X Superior Coating Systems $55,000,000
15 Sico Inc. $224,000,000 40 PARA Paints $52,000,000
16 Rohm and Haas Co. $200,000,000 41 California Products Corp. $50,000,000
17 M.A.B. Paints $170,000,000 42 Muralo Co. Inc., The $50,000,000
18 Lord Corp. $150,000,000 43 Samuel Cabot Inc. $50,000,000
19 TruServ Corp. $130,000,000 44 Seibert Powder Coatings (sub of Nippon) $48,000,000
20 Ace Hardware Corp. $129,000,000 45 Color Wheel Paint & Coatings $48,000,000
21 Diamond Vogel Paints Co. $125,000,000 46 Columbia Paint & Coatings $45,000,000
22 Ameron International Performance Coatings & Finishes Co. $113,000,000 47 U.S. Paint Corp $43,000,000
23 Ferro Corp. $100,000,000 48 Iowa Paint Manufacturing Co. Inc. $41,000,000
24 P.D. George Co. $100,000,000 49 Deft Inc. $40,000,000
25 Red Spot Paint & Varnish Co. $95,000,000 50 United Gilsonite Laboratories $40,000,000
16 / 50 remain today. Several more encumbered. Top 5: ~$11 billion revenue
Source: Paint & Coatings Industry Magazine, June 2002
5
2017 TOP 25 COATINGS COMPANIES BY SALES
Rank Company Coatings Sales
1 PPG $14,800,000,000
2 The Sherwin-Williams Co. $11,820,000,000
3 RPM International Inc. $4,960,000,000
4 Axalta Coating Systems $4,400,000,000
5 Behr Process Corp. $1,910,000,000
6 Benjamin Moore & Co. $1,300,000,000
7 Ennis-Flint $625,000,000
8 Shawcor Ltd. $405,000,000
9 Kelly-Moore Paint Co., Inc. $300,000,000
10 Innovative Chemical Products (ICP) Group $250,000,000
11 Cloverdale Paint Inc. (combined with Rodda Paint) $231,000,000
12 Diamond Vogel Paint Inc. $170,000,000
13 Yenkin-Majestic Paint Corp. $150,000,000
14 Tnemec Company Inc. $124,000,000
15 ELANTAS PDG Inc. $115,000,000
16 Hentzen Coatings Inc. $100,000,000 - $110,000,000
17 True Value Company $100,000,000
18 Vista Paints $90,000,000 - $110,000,000
19 Suncoatings Inc. $65,000,000
20 Gemini Industries $60,000,000
21 TIGER Drylac U.S.A. Inc. $59,700,000
22 Sheboygan Paint Co. $50,000,000
23 Farrell-Calhoun Inc. $40,300,000
24 Lanco Paints & Coatings $23,000,000
25 Fortech Products Inc. $17,500,000
Few giants, a few $100mm plus, and small players. Top 5: ~$38 billion revenue
Source: Paint & Coatings Industry Magazine, July 2018
6
Market Capitalization ($ millions)
–
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
NYSE:SHW
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
NYSE:PPG
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
PPG AND SHW MARKET CAPITALIZATION: 2001-TODAY
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
7
2018: OH NO! GODZILLA!!!
Brand strength
Raw material purchasing
Raw Material supplier consolidation
Distributor consolidation
Administrative cost savings
Supply chain / logistics efficiencies
Regulatory cost absorption
Production synergies
Technology
Expanded distribution
“My weighted average cost of
Extended geographies capital is less than 10% -
Opportunity to diversify with scale ROAR!!!!”
- Godzilla, 2018
Cost of Capital
8
SO, WHAT SHOULD WE DO?
“the optimal business strategy
depends upon the makeup of
the shareholders….”
-- me, trying to sound important
9
BUSINESS STRATEGY DEPENDS ON THE SHAREHOLDERS
Private Businesses
Private Equity
Public Companies
10BUSINESS STRATEGY DEPENDS ON THE
SHAREHOLDERS
Private businesses – least aggressive strategically and transactionally
Preserve the asset!
Public companies – moderate risk taking strategically and transactionally
Set and exceed expectations versus peers
Private equity – generally extremely aggressive both strategically and transactionally
Diversification across multiple PE investments allows for aggressive strategy, tactics and
capital structure
So, what is the best strategy?
If you don’t know the shareholders, you cannot answer this question
A strategy that is “right” for PE-backed platforms is probably “wrong” for large
public companies and private businesses, and vice versa
As examples, specific growth objectives, capital expenditures, acquisition appetite and valuation,
geographical expansion, debt tolerance and management incentives are all extremely dependent on the risk
tolerance and expectations of the shareholders
11PRIVATE BUSINESSES
First and foremost: Protect the family jewels
12YESTERDAY VERSUS TODAY
Ancient history (pre-2001): Godzilla was scary, but not too scary
The top 5 coatings companies totaled ~$11 billion in revenue
Private companies didn’t just survive, they thrived
Could effectively compete for quality business daily
Basically, you could “outhustle” the structural cost disadvantages the industry presented
Multigenerational businesses were good investments for families, and the next
generation wanted to take on the job of protecting the asset and growing the company
Today: Godzilla has real teeth!
Top 5 coatings companies total revenue ~ $38 billion
SHW and PPG individually have revenues in excess of top 5 total from 2001
Risk profile of coatings/chemical businesses is high and increasing
Financial – cost disadvantages, capital markets
Regulatory – lead, asbestos, labelling, FCPA
Litigation – SHW Ad from 1904
Criminal – Hurricane Harvey / Arkema’s peroxide business
Next generation rethinking the future given market conditions
13PRIVATE EQUITY
Sammy Sosa - PE Role Model!
14THE PRIVATE EQUITY BUSINESS MODEL
Shampoo Bottle Approach: Lather, Rinse, Repeat
Buy a number of Return $100M +
Raise $100M After 3-7 year Calculate fund
companies via Fee generation profit on sale of
Fund I from holding period, performance
leveraged during fund life companies to
investors sell companies and repeat
buyouts investors
Combination of Funded with 1%-2% annual fees Sell to either Share profits after Current target for
pension funds, combination of on invested funds strategic buyer, return of capital middle market
insurance equity (cash) and another PE fund (sale of acquired funds is ~20% IRR
companies and / or debt Annual management or IPO companies): 80%
high net worth fees from portfolio to institutional If fund’s IRR beats
individuals Use cash flow from companies investors / 20% to industry average,
acquired businesses fund raise bigger fund
to pay down debt Paid to managers ($250M Fund II)
over time and employees of and repeat steps
the fund above
Increase EBITDA
(improve operations,
cut costs, grow
organically or
through
acquisitions)
15PRIVATE EQUITY IN FOUR GRAPHS
1 Increased # of PE Firms 2 Increased Dry Powder
900
1,800
Dry Powder ($ billions)
750
1,600
600
1,400
450
1,200 300
2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017
3 Increased Debt Availability 4 Increased Equity Contribution
6.0x 60%
5.0x 50%
5.6x 5.6x
4.0x 4.9x 5.1x 5.1x 40%
4.7x 4.8x Firms Historically Utilize 40% Equity
4.1x
3.0x 30%
2010 2011 2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017
1) More private equity firms, 2) with more equity money they MUST invest, 3)
with greater access to debt, 4) at lower IRRs.
Source: PitchBook
1
+ 2
+ 3
+ 4
=…
16PRIVATE EQUITY IS ACTIVE AND COMPETITIVE
Median North American Private Equity EV/EBITDA Multiples (All Industries)
2010 – 2017
10.0x 10.2x 10.3x
10.0x 9.2x
8.8x
8.2x 8.1x 8.2x
8.0x 4.4x 4.7x
5.1x
4.1x
3.6x 4.0x 3.2x
6.0x 4.1x
4.0x
4.9x 5.1x 5.6x 5.1x 5.6x
2.0x 4.7x 4.8x 4.1x
0.0x
2010 2011 2012 2013 2014 2015 2016 2017
Debt/EBITDA Equity/EBITDA Valuation/EBITDA
Record amount of private equity capital:
12/2016 - 4,300 active US PE funds
Control $1.5 trillion dollars of equity capital
Operating partners / industry experts or other “angle”
Returns rates dropping dramatically (market efficiency)
17SAMPLE LEVERAGE BUYOUT ANALYSIS
($'000s)
Sources Uses
% of Total x 2018A 2018E EBITDA $21,650
Account Amount Cap Equity % EBITDA Rate PIK Transaction Multiple (2018 EBITDA) 7.5x
Revolver – – 0.0% – L + 350 – Purchase Price 162,375
Senior Term 86,600 52.2% 0.0% 4.00x L + 500 – Transaction Expenses 3,681
Mezzanine 10,825 6.5% 0.0% 0.50x L + 1100 – Total Uses $166,056
Current Ownership Roll – – – – – –
New Private Equity 68,631 41.3% 100.0% 3.17x – –
Total Sources $166,056 100.0% 100.0% 7.67x
Capitalization
At Close 2019 2020 2021 2022 2023
Revolver – – – – – –
Senior Term Debt 86,600 75,664 62,930 48,117 31,477 12,886
Mezzanine Debt 10,825 10,825 10,825 10,825 10,825 10,825
Equity 68,631 76,778 87,855 100,278 114,400 130,346
Total Capitalization 166,056 163,266 161,610 159,220 156,702 154,057
Cash Balance – – – – – –
IRR Return Analysis
Purchase Price / 2018 EBITDA Mutliple
22.6% 6.5x 7.0x 7.5x 8.0x 8.5x
6.5x 28.1% 22.9% 18.7% 15.2% 12.3%
7.0x 30.3% 24.9% 20.7% 17.2% 14.2%
Exit Multiple (of 2023 EBITDA) 7.5x 32.3% 26.9% 22.6% 19.0% 16.0%
8.0x 34.2% 28.7% 24.3% 20.7% 17.6%
8.5x 36.1% 30.5% 26.0% 22.3% 19.2%
KEY TAKEAWAY: PE FUNDS GRADED ON A CURVE
18PRIVATE EQUITY’S LITTLE SECRET……
You don’t walk your way off an island!
19PUBLIC COMPANIES
“I don’t need to outrun the bear!”
20GM CHEMICALS INDEX: HISTORICAL PUBLIC
EBITDA MULTIPLES
14.0x
100 Publicly Traded Chemical Companies EV / EBITDA multiples
Current: 12.2x
12.0x Low: 5.2x
February 2009
10.0x
8.0x 10Y Avg. Multiple: 10.5x
6.0x
4.0x
2.0x
0.0x
Note: The Grace Matthews Chemical Index is comprised of 98 publicly-traded chemical companies, spanning multiple markets, geographies, and company sizes.
21GM CHEMICALS INDEX: HISTORICAL EBITDA TRADING
MULTIPLES BY SUBSECTOR 2015-18
Multiples have trended upwards from 2015 to present across nearly all chemical sub-sectors
Top sectors by public trading EBITDA multiples:
Flavors & Fragrances: 19.9x
Paints & Coatings: 15.7x
Adhesives: 14.3x
Agriculture: 13.5x
Public Trading EBITDA Multiples by Sector
Dec-15 Dec-16 Dec-17 Current
25.0x
19.9x
20.0x
15.7x
14.3x 13.5x
15.0x 12.2x 12.7x 12.0x 12.9x 12.9x
10.7x 11.4x 9.1x 10.0x
10.0x 7.1x
7.0x
5.0x
0.0x
Note: The Grace Matthews Chemical Index is comprised of 98 publicly-traded chemical companies, spanning multiple markets, geographies, and company sizes.
22OK, YOU ARE BIG, PUBLIC AND HAVE A GROWTH
MULTIPLE. HOW DO YOU GROW EARNINGS?
Possible bottom line growth drivers
Cost cutting (on your own, or with activist investor “help”) – one time benefit
Pricing power
New technology
Possible top line growth drivers
Coatings acquisitions (few remaining pureplay targets remain – the math is tough!)
Trench warfare – win business (zero sum game for industry)
Technology, maybe?
New products and markets?
Must be big enough to move the needle – paint brushes and sprayguns ain’t enough!
So, what is a big enough and adjacent enough that won’t make Wall Street shudder?
23BUILDING PRODUCTS – THE NEW PAINT?
Relatively simple math – Grow or suffer!
Public companies are priced at multiples that assume growth well beyond what is possible organically
As the big get bigger, the law of big numbers catches up – they are “the market”
There are not enough acquisition targets in paint that are sizeable, let alone actionable, in paints and
coatings
Building products is one logical extension. The bridge from paint goes something like this…..
Paint…..
Solvents, stains, floor coatings, etc (“paint-like” and related – very comfortable here!)
Other “goop in a can” – waterproofing, roof coatings, etc. (comfortable here, too!)
Building envelope / perimeter products not in a can (broadly defined) - Rolled goods, adhesives and
sealants, soundproofing, fire protection, tapes, non-chemical products
Nails, screws, hardware, tools, lumber – the other 192 aisles at Lowes - Too far, for now.
“But who buys it? Where? Who applies it? Can we trust them?” – Good questions, all!
Most large coatings companies dabble here, either directly or as a channel partner, but I suspect
that the dabbling becomes serious via acquisition in the near future
24BUILDING PRODUCTS*
Historical issues in the Paint and Coatings industries soured us on Building Products*
Asbestos snuck in via legacy building products acquisitions
Product liability / class action suits for roof coatings, floor coatings, drywall, wood preservation, and
other building products had disproportionate impact on the coatings industries view of these types of
products and markets
Contractor QC, warranty issues, etc. are higher risk than in traditional paint world
PPG, SHW, AKZO already have dipped toes in the water here, but some have fully
embraced the Building Products strategy:
RPM is arguably a building materials company as much as a paint company (with DAP and Tremco as
the obvious examples)
About ½ of Quest was building products (sold to GAF)
½ of Jones Blair (NeoGard) was commercial construction (sold to Hempel)
More than ½ of ICP (Innovative Chemical Products) are specialty Construction Products
* Broadly defined: Construction Products, Building Products, Construction Chemicals
25ICP EXAMPLE: CONSTRUCTION PRODUCTS AND PAINT
Audax backed ICP has made 10 acquisitions to date. Notable deals include
California Products, 3M’s Polyfoam business, FOMO and Nicoat
26ICP – MULTIPLE STRATEGIC GROWTH AREAS*
Window HD/LD Maintenance
Sealers / Caulk Insulating Film Coatings
Carpet Backing
Adhesive
Concrete Care
Marking Paint
Examples of possible organic and inorganic growth areas*
* Grace Matthews opinion solely, not based on any proprietary ICP information
27WHAT DOES ALL THIS MEAN IN THE DEAL WORLD?
Values at historical highs
Sellers market: supply and demand imbalance
“Priced to perfection” creates due diligence and execution risk at unusually high
levels
“It seems relatively simple – a lot of deals at high prices!”
28WHAT IS DRIVING INCREASED M&A ACTIVITY?
1 Strong Macro Environment
2 Consolidation – “Race to the Top”
External Pressure
3 Activist Investors
4 Increased Private Equity Activity
Strong Balance Sheets /
5
Pressure to Grow!
Internal Pressure
6 Portfolio Management Efforts
29WHAT IS BEING SAID ABOUT THE CHEMICAL M&A MARKET?
“Sentiment Drives Action”
“Robust Coatings M&A Market”
30ECONOMIC TAILWINDS ARE DRIVING STRONG
COMPANY PERFORMANCE
Industrial Production Light Vehicle Sales Unemployment Rate and Civilian Labor Force
Participation Rate
160 20.0 67.0% 12.0%
150 18.0
66.0%
Civilian Labor Force Participation Rate
140 16.0 10.0%
130 14.0 65.0%
Millions of Vehicles
8.0%
100=2012 Levels
Unemployment Rate
120 12.0
64.0%
110 10.0 6.0%
100 8.0 63.0%
90 6.0 4.0%
62.0%
80 4.0
61.0% 2.0%
70 2.0
60 0.0 60.0% 0.0%
Aug-07
Aug-08
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Aug-18
Seasonally Adjusted Annual Rate Labor Force Participation Rate Unemployment Rate
Industrial Production Production of Crude Oil
12 Month Moving Average
Construction Spending Industrial Production: Key End Use Markets Housing Starts (in thousands)
% Change Y/Y (3MMA) January 2018
$1,200,000
-4 -3 -2 -1 0 1 2 3 4 5 6 7 8 1,600
Value of Construction Put in Place ($millions)
Industrial Production (Total)
$1,000,000 1,400
Semiconductors
Iron & Steel
Fabricated Metal Products 1,200
$800,000
Thousands of Units
Computers & Electronics
Structural Panels
Plastic Products 1,000
$600,000 Foods & Beverages
Construction Supplies 800
Petroleum Refining
$400,000 Textile Mill Products
600
Rubber Products
Appliances
$200,000 Foundries 400
Motor Vehicles and Parts
Aerospace 200
$0 Paper
Furniture
Priniting
Private Public
31INCREASED M&A ACTIVITY OVER THE LAST 18 MONTHS
Announced Global M&A Transactions by Quarter
Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Dow – DuPont: Sep. 2017 Univar – Nexeo: Sep 2018
Adhesives 11 9 8 12 15 Transaction Size: $73 Billion Transaction Size: $2.0 billion
Rationale: Facing activist investor pressure Rationale: pressure on distributors to add
Agriculture 20 21 20 20 21 because of stagnation resulting from intense scale, as their suppliers and customers
price competition, Dow and DuPont agreed consolidate. This combines the #2 and #5
to a $70+ billion merger to ward off global chemical distributors. Largely scale
Building Products 58 55 81 55 68 competition and increase access to funds for driven: Supply chain optimization, fleet
growth. The merger allows the companies to utilization, purchasing power. $100mm cost
Commodity 16 8 32 25 19 navigate challenges in the agricultural and
chemical industries and eliminate redundant
synergies, offset by a one tome $150mm
integration charge.
operations.
Distribution 9 14 9 10 15
Diversified Chem. 47 57 38 24 41
Flavors &
10 15 8 3 6 LyondellBasell – A. Schulman: Sep. 2018 Nippon Paint – Dunn Edwards: Mar. 2017
Fragrances
Transaction Size: $2.3 Billion Transaction Size: $595 Million
Industrial Gases 2 4 5 4 4
Rationale: Lyondell was looking to expand its Rationale: Foreign buyers are aggressively
existing compounding business. The addition seeking a local footprint in the U.S., but there
Minerals 5 9 8 14 4 of A. Schulman's business will double are few remaining independent architectural
Lyondell’s compounding business and create coatings manufacturers. Dunn was one of the
Paints & Coatings 19 14 25 24 21 a premier global provider of advanced
polymer solutions with extensive geographic
last sizable candidates available.
reach.
Resins & Polymers 13 17 40 23 23
Surfactants 2 3 0 0 1
Water Treatment 7 10 13 6 2
32 32SHAREHOLDER ACTIVISM IN COATINGS VALUE CHAIN
Activist investors have, to one extent or another, impacted a significant
number of companies in the Coatings value chain
33RECENT PE ACTIVITY IN THE RM VALUE CHAIN
Select PE Holdings in Coatings Value Chain
Example: Chemical Company A
Revenue: $100 mm Growth Rate: 3.0% / year
EBITDA: $20mm Same buy-in/sale multiple
Year of Sale 2010 2018
Debt Multiple 3.5x EBITDA 5.0x EBITDA
Debt Pricing L+9.0% L+7.0%
Target Equity IRR 20%+ 18%+
Price / Multiple $150 mm / 7.5x $200 mm / 10.0x
Takeaway: The same business marketed in 2010 vs. 2018
would generate a minimum 33% increase in value, based solely
on capital markets. In other words, cheaper and more
available debt, combined with lower expected private equity
return expectations, adds $50mm in value to a $150mm
company.
34STRONG BALANCE SHEETS AND CREDIT AVAILABILITY
Select Public Companies from the GM Chemical Index (3)
Relative debt tolerance differences between
public companies and PE backed businesses Company
Net Debt /
EBITDA
Debt Capacity at TEV / TEV /
4.0x EBITDA LTM Revenue LTM EBITDA
reflect shareholder expectations and drive DowDuPont 1.5x $67,496 2.2x 10.4x
BASF
capital structure.
1.0x 58,607 1.3x 6.6x
3M 1.3x 34,120 4.2x 16.2x
Ecolab 2.4x 12,093 3.7x 17.4x
Air Products 0.3x 11,894 4.4x 13.0x
Median Net Debt / EBITDA ratios: Eastman 2.8x 9,404 2.0x 8.6x
Wacker Chemie 0.7x 4,786 1.2x 5.9x
FMC Corporation 2.4x 4,574 3.6x 13.0x
Strategic Median Debt - 2.3x EBITDA Akzo Nobel
Albemarle
3.1x
0.7x
4,298
4,104
2.5x
3.6x
8.7x
11.6x
PE Backed Median Debt - 6.2x EBITDA Clariant 1.7x 4,026 1.6x 10.3x
RPM 3.0x 2,616 1.9x 15.9x
Ashland 3.8x 2,464 2.1x 12.3x
W.R. Grace 4.1x N/A 3.7x 14.7x
Median Historical Debt / EBITDA Multiples (2) PolyOne 3.1x 1,521 1.3x 12.1x
H.B. Fuller 6.0x N/A 1.6x 12.9x
Kemira 2.6x 1,389 1.0x 8.5x
7.0x 6.2x
5.4x 5.7x 5.7x Sensient Technologies 2.7x 1,065 2.8x 14.9x
6.0x 5.0x 5.1x 5.2x
5.0x 4.6x Innospec 0.9x 706 1.4x 11.2x
4.2x
4.0x
3.0x Summary Statistics
2.0x Mean 2.3x 2.4x 11.8x
1.0x Median 2.4x 2.1x 12.1x
0.0x High 6.0x 4.4x 17.4x
2010
_____________________
2011 2012 2013 2014 2015 2016 2017 2018 (Q2) Low 0.3x 1.0x 5.9x
1. Preqin, Q2 2018 Private Equity update.
2. Pitchbook, U.S. private equity breakdown / Thomas Reuters LPC. Note: Theoretical analysis showing a company’s borrowing capacity assuming leverage of
3. Capital IQ, data as of October 2, 2018. 4.0x Net Debt / EBITDA.
35M&A – PORTFOLIO MANAGEMENT
Bolt-Ons / Consolidation Carve-Outs Transformational
Description: Small/mid-sized Description: Divestiture of non- Description: Large-scale
acquisitions that supplement core business or assets by parent acquisition that establishes a new
existing business organization business model or adds significant
scale
Drivers: Desire to expand Drivers: Monetization of business Drivers: Synergy capture or
products/markets/capabilities or unit that may not be core to parent; consolidated industry
enter new geographies. Cross- capital deployment elsewhere
Scale
selling opportunities and cost
Recognition of strong valuations Synergies
synergies are prevalent.
Push for portfolio optimization Margin expansion
Pure-play vs. Diversification
~12 deals completed ~15 deals completed
since 2016 since 2015
36STRATEGICS PAYING FOR SYNERGIES: SHW / VAL
Exceptional Strategic Fit – Size, Markets, Geographies, Products
Purchase price ~ $9.1 billion = ~15.0x EBITDA
Valspar at the time of the transaction:
Valspar EBITDA: $0.7 billion (15.0x EBITDA)
Valspar Revenue: $4.3 billion (2.7x revenue)
Synergy target: $280 million (~6% of revenue) by 2018
Nearly half coming from raw materials
Purchase multiple including synergies: 10.9x EBITDA
Synergy Update: Full-year synergy run rate in 2017 was $230 million
$320 million in synergies to be achieved by 2018 year-end
Long-term synergy run-rate of $385 - $450 million
Assuming SHW reaches the full $320 million of synergies = ~10.0x EBITDA multiple paid
37STRATEGICS PAYING FOR SYNERGIES: SHW / VAL
Exceptional Strategic Fit – Size, Markets, Geographies, Products
Purchase price ~ $9.1 billion = ~15.0x EBITDA
Valspar at the time of the transaction:
Valspar EBITDA: $0.7 billion (15.0x EBITDA)
Valspar Revenue: $4.3 billion (2.7x revenue)
Synergy target: $280 million (~6% of revenue) by 2018
Nearly half coming from raw materials
Purchase multiple including synergies: 10.9x EBITDA
Synergy Update: Full-year synergy run rate in 2017 was $230 million
$320 million in synergies to be achieved by 2018 year-end
Long-term synergy run-rate of $385 - $450 million
Assuming SHW reaches the full $320 million of synergies = ~10.0x EBITDA multiple paid
38DOES THE MARKET LIKE IT?
60%
50% Transaction Announced:
March 2016
40%
30%
Since the SHW / Valspar
transaction announcement,
20%
SHW has added ~$16 billion
in market cap vs PPG
10%
0%
-10%
SHW PPG
-20%
Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18
39GRACE MATTHEWS COATINGS INDEX
18.0x
16.7x EBITDA
16.0x
14.0x
Enterprise Value / EBITDA
12.0x
10.0x
8.1x EBITDA
8.0x
6.0x
Since 2001, Public Market
coatings EV / EBITDA
4.0x multiples have doubled
from 8 to almost 17
2.0x
Paints & Coatings
-
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Timeline: January 2001 to September 2018
40SELLERS MARKET – A PERFECT STORM
Scarcity of high quality targets of scale – sellers call the shots on value,
terms and sale process
Many private chemical business owners are rethinking the family “hold”
strategy
Long and medium term industry structure very unfavorable to subscale coatings
/ chemicals producers
The intangible benefits of owning a chemical business have declined
Public sector strategic buyers have intense pressure to grow – the 16.7x
EBITDA public multiple has growth baked in
Private equity is a viable buyer of businesses at strategic pricing
The pressure to place money on PE cannot be overstated
We are seeing PE do things we never would have believed in terms of value
and flexibility
41PRICED TO PERFECTION
42PRICED TO PERFECTION
At today’s outlier values,
Seller expectations are high, and
Buyers have no margin for error.
Repricing is largely dead.
Instead, surprises kill deals.
The amount of preparation
required to close
is paradoxically
high.
43WRAP UP AND THANK YOU
2001 to 2018: The rise of Godzilla and the
disappearance of the middle!
Optimal strategy depends on the shareholders
Building Products: The New Paint? – I think so!
Priced to Perfection: No surprises!
44JOHN BEAGLE
THOUGHTS ON COATINGS AND CEO AND CO-FOUNDER
CHEMICALS M&A - 2018 GRACE MATTHEWS, INC.
ACA FALL COMMITTEE MEETINGS
SCOTTSDALE, AZ
OCTOBER 2018You can also read
