Heard on the Street: There's a Paint Company to Own, But Akzo Nobel Isn't It

Akzo Nobel shareholders shouldn't hesitate to sell.

The Dutch paint group's refusal to enter talks with U.S. peer PPG Industries, despite intensifying calls from key investors to do so, has laid bare not just the board's lack of commitment to owners' interests but also the protection from shareholder pressure afforded by the company's capital structure and Dutch law. This cannot be the basis for a sound investment -- especially at such a lofty price.

Even now that PPG has made clear it won't mount a hostile bid -- Thursday was its deadline under Dutch "put up or shut up" rules -- Akzo Nobel shares are trading close to an all-time high, and 16% higher than before the company made PPG's first public offer in early March. Just about all investors will be able to sell out at a substantial profit.

These include Elliott Management. The New York activist lost a court case on Monday that would have forced Akzo Nobel to hold a shareholder vote on Chairman Antony Burgmans, who many saw as the obstruction to a deal. It has egg on its face for pinning its hopes on a legal strategy that failed, but can be comforted by big gains on its stake, which was accumulated late last year with a view to pressing management to sell or spin off its specialty chemicals business. One of the ironies of the battle between Elliott and Akzo Nobel is that the company will end up performing this split as the centerpiece of a stand-alone strategy hurriedly put together in the wake of PPG's offer.

Some investors may be tempted to hold on to their shares on the basis that this split will -- finally -- unwind the conglomerate discount at which the shares have historically traded. But hopes are already high: Akzo Nobel stock trades at a premium to PPG's for the first time in half a decade.

And a governance discount might yet emerge, given the board's failure to listen to long-term shareholders. Despite being unaccustomed to noisy protestations, several of these went public with their displeasure over Akzo Nobel's refusal to engage with PPG. The company's antitakeover defenses have also been effectively tested, giving management scope to relax.

PPG's shares rose 3% on news of its withdrawal. The company, which has had success in consolidating the U.S. industry alongside Sherwin-Williams, may now move to acquire another paint group in the fragmented European market, argues Graham Copley at investment-research house SSR. That will put further pressure on Akzo Nobel, which will be a smaller company after its coming split.

If there's a paint giant to own, PPG looks the one.

Write to Stephen Wilmot at stephen.wilmot@wsj.com

(END) Dow Jones Newswires

June 01, 2017 11:43 ET (15:43 GMT)