Akzo Nobel in Merger Talks With Axalta -- Update

Akzo Nobel NV and U.S. rival Axalta Coating Systems Ltd. are considering a possible merger of equals that would create a multibillion-dollar coating and paints giant, according to a person familiar with the matter.

The possible deal under consideration would involve the Dutch paint company first proceeding with its existing plans to spin off its speciality chemicals business and distributing proceeds to shareholders, the person said.

While preliminary talks about a possible deal have previously been reported, it wasn't clear that they centered on structuring the deal as a merger of equals.

The combined company would have added scale to generate better pricing for raw materials, eliminate overlapping operations and gain new customers to help revive profit growth. Coatings are used to prevent corrosion and improve durability across a range of sectors such as the automotive, electronics, mining and marine industries.

The talks are at an early stage and could collapse before a deal is reached, according to the person familiar with the matter.

A merger of equals typically involves companies with a similar market value. The deals are structured through a share swap and shareholders of neither company receive any significant premium for their stock. This type of structure would be crucial in an attempt by Akzo to win support from its shareholders, some of whom have been concerned that the Amsterdam-based company could seek a major acquisition, potentially paying a big premium, to protect itself against an unwanted suitor.

Earlier this year, Elliott Management Corp., the well-known activist investor and one of Akzo's biggest shareholders, mounted a bold public-relations and legal campaign to force Akzo into unwanted sale talks with its U.S. paints rival PPG Industries Inc. The $28 billion takeover attempt ultimately failed. In August, Elliott and Akzo reached a truce over the Dutch company's alternative plan to separate its specialty-chemicals business and distribute the proceeds to shareholders to generate value for investors.

Currently, Akzo has market value of about $22.6 billion, compared with Axalta's value of about $8.1 billion. That gulf in valuation precludes a merger of equals and would instead require Akzo paying a takeover premium to acquire Axalta. By selling or spinning off the specialty chemicals business first as a condition to a deal with Axalta, Akzo's market value would likely fall more closely in line with its Philadelphia-based rival. Some analysts estimate the specialty chemicals business could be worth up to $10 billion, which would no longer be reflected in Akzo's market capitalization after the spinoff.

Akzo has stressed that its plan to spin off the chemicals business and distribute the proceeds to shareholders remains on track.

Even with the spinoff of the specialty chemicals business, Akzo could face difficulty getting its shareholders to support an Axalta deal because the merger would make it more expensive than it otherwise would be for a potential suitor.

On Friday, Swiss chemicals company Clariant AG and U.S.-based Huntsman Corp. ended their proposed $15 billion merger after Clariant's largest shareholder, activist investor White Tale Holdings opposed the deal. That led some analysts to speculate that Clariant is now a prime takeover target in the consolidating chemicals sector.

That said, talks of a possible merger between Akzo and Axalta may appeal to shareholders as the companies seek ways to boost slumping profits, allowing it to cut costs and potentially broaden its customer base.

For the third quarter, Akzo reported a 13% drop in adjusted operating profit, hurt in part by higher raw material costs and sluggish demand from the marine industry. Axalta's adjusted net income fell 20% over the same period amid lower volumes in North America and higher raw material costs.

Write to Ben Dummett at ben.dummett@wsj.com

(END) Dow Jones Newswires

October 28, 2017 10:44 ET (14:44 GMT)