Akzo Nobel: One way or another

Akzo Nobel has fended off a second approach in 2 weeks from PPG.  The improved offer values each Akzo Nobel share at €90 which is a ~8% improvement to the €83 a share bid two weeks ago. Akzo’s rejection of the second approach has not gone down well with its shareholders with at least three high profile shareholders (including Elliott Capital) calling Akzo to engage with PPG this time. A shareholder poll conducted by Bernstein indicates that shareholders want Akzo to engage with PPG and push for a higher price of ~€95 a share.

I believe that Akzo Nobel’s shares have a 15% - 22% upside one way or another. If the PPG deal happens at the current price, there is a ~17% upside to the current share price. Better still would be if the PPG deal doesn’t happen and Akzo spins-off its Speciality Chemicals business as its board as indicated it will; this should unlock a ~22% upside at a much lower risk. The PPG deal has significant political and antitrust risks that the spin-off doesn’t have. 

Valuation

My DCF valuation for Akzo Nobel gives a value per share in the range of €88 - €90 for an upside to current share price of 15%.

In a spin-off scenario, Akzo Nobel’s Speciality Chemicals division could command an enterprise value of €8.8bln based on the sector's average EV/EBITDA of 10.3x; the remaining Paints and Coatings businesses could command an enterprise value of at least €17.5bln using the multiple on which other pure play paints and coatings trade (Sherwin-Williams, Valspar, PPG and RPM International Inc.). Adding the stand-alone enterprise values gives Akzo Nobel a combined enterprise value of €26.3bln and subtracting debt of €2.6bln gives a per share price of ~€94.

The PPG valuation of €90 per share (cum dividend) falls within the range of values derived above. However, as discussed, the PPG deal comes with a significant political and antitrust risk and could take longer to consummate than the spin-off of the Speciality Chemicals division. Even the the PPG deal happens, it is highly likely that PPG will sell off the Speciality Chemicals division as there are no synergies to PPG's core paints business.

As they say in the trade, Akzo Nobel's shareholders would be better off if the board adopted a DIY (Do It Yourself) approach than getting PPG to DIFM (Do It For Me).