Endgame Nears in PPG's Pursuit of Rival -- WSJ

Michael McGarry, chief executive of U.S. paint company PPG Industries Inc., has a big decision to make: Does he take the risky and rare step of going hostile in his $27 billion pursuit of Dutch rival Akzo Nobel NV...or walk away?

Early Monday, Akzo rejected PPG's latest takeover offer. Mr. McGarry has said he was ready to go around the company's board and management and take his pitch directly to shareholders. Such a move would be highly unusual for big, cross-border deal-making and could trigger a bitter battle for shareholder support. Even if PPG were to win over investors, Akzo's Dutch-based corporate structure could still allow a bloc of its current directors to thwart such a deal.

Akzo said it rejected PPG's latest, sweetened EUR24.6 billion ($27.1 billion) offer after "considerable in-depth analysis." Akzo Chief Executive Ton Büchner and the company's supervisory board chairman, Antony Burgmans, met with Mr. McGarry in Rotterdam, the Netherlands, on Saturday.

PPG said in a written statement that the meeting lasted less than 90 minutes and that Messrs. Büchner and Burgmans "stated up front that they did not have the intent nor the authority to negotiate." Mr. Büchner, speaking on a conference call with reporters Monday, called the encounter cordial and said he and Mr. Burgmans went in "open-minded."

The Dutch company insisted Monday that its go-it-alone strategy would create greater value for shareholders. PPG said in a written statement it was disappointed and believed that its proposal was superior to any stand-alone plan.

Mr. McGarry has said he won't raise his bid, but he has said PPG is preparing a public tender for Akzo. Going ahead with such a move, without management consent, would, for all practical purposes, equate to a hostile bid. Dutch law requires PPG to publish a draft of its tender by June 1.

Other suitors in similar standoffs have opted to abandon their pursuit, instead of engaging in a potentially long and bitter fight with the board and management. Monsanto Co. dropped a $46 billion cash-and-stock bid for Swiss rival Syngenta AG in 2015 amid management's insistence on holding out.

Backing down carries its own risks. China National Chemical Corp. later agreed to buy Syngenta for $43 billion in an all-cash offer. And then last year, Bayer AG of Germany snapped up Monsanto for $57 billion.

PPG's chances of success in its Akzo bid are clouded even further because of Akzo's Dutch corporate structure. PPG enjoys support for its bid from some of Akzo's key shareholders, led by U.S. activist investor Elliott Management Corp. Elliott is pressing to persuade management to discuss a deal. Last week, it published a report it commissioned that forecast large job losses at Akzo in the event it didn't agree to a tie-up. Akzo rejected those findings.

Other large shareholders have also voiced support for a deal, making it possible for PPG to win over enough shareholders in a tender offer to advance the bid. But the path to an eventual combination gets more complicated from there.

Akzo's corporate structure includes a controlling foundation not uncommon for a Dutch company. The four foundation directors, including Mr. Burgmans, Akzo's chairman, hold seats on Akzo's supervisory board.

They can be voted off Akzo's board in a special shareholder meeting, and Elliott is calling for a meeting specifically to replace Mr. Burgmans. Akzo has refused to hold a meeting and argues it has the sole right to decide whether to call one. Elliott has threatened to appeal to a Netherlands-based business court, called the Enterprise Chamber, to force a meeting. Elliott had no immediate comment Monday.

The obstacles don't end there. Even if a meeting were held, and shareholders removed Mr. Burgmans, the directors of the controlling foundation -- including Mr. Burgmans -- retain the exclusive rights to nominate replacement directors at Akzo. Supporters of such a structure say it protects stakeholders in the company other than investors -- for instance, workers.

Some observers say PPG could still prevail. A commitment to proceed with a tender offer could provide enough pressure for those board members to wave the white flag. Should they hold out, however, and PPG wins over shareholders in a tender offer, pressure would only mount.

Pittsburgh-based PPG initiated its courtship of Akzo at the start of March, offering cash and stock valued at EUR83 a share. It sweetened the bid to EUR88.72 a share later that month. Last month, it raised its offer sharply again, to EUR96.75.

PPG called that offer "one last invitation" for Akzo to engage in talks. Akzo shares were trading below EUR82 each on Monday afternoon in Hamburg, suggesting still-deep skepticism over a deal.

Write to Christopher Alessi at christopher.alessi@wsj.com and Ben Dummett at ben.dummett@wsj.com

(END) Dow Jones Newswires

May 09, 2017 02:47 ET (06:47 GMT)