PPG Needs to Get Messy to Win Paint Mega Merger -- Heard on the Street

By Stephen WilmotFeaturesDow Jones Newswires

Storming its European takeover target with an all-out $27 billion hostile bid would be too risky for paint group PPG. A long, uncertain siege is now the only likely path to creating the world's largest paint maker.

On Monday, Pittsburgh-based PPG received its third rejection in two months from the management of Dutch peer Akzo Nobel. PPG made clear its latest, late-April offer of EUR96.75 in cash and stock for each Akzo share was its last. Its next step is to go "hostile" by making an offer directly to Akzo shareholders, without the support of its management. Akzo's shareholders, judging by public statements, like the deal.

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But there is a major barrier: Like many large Dutch companies, Akzo has a "stichting" or foundation that owns "priority shares" giving it the right to appoint management. Without the foundation's cooperation, PPG could find itself owning Akzo but unable to appoint management. Given that Akzo would account for just over half the combined company's sales, this isn't a risk PPG can afford to run.

Any "hostile" offer therefore needs to be conditional on the stichting waiving its rights--which would require friendly talks. Unfortunately, the foundation's board consists of four members of Akzo's supervisory board, the body that oversees the company's governance. These include Chairman Antony Burgmans, a key opponent of the deal.

PPG may decide to proceed with a conditional hostile offer in the hope that relentless drubbing of Akzo for its stubborn refusal to consider what its shareholders want will eventually force the stichting to capitulate. The cause may be helped by activist shareholder Elliott Management, which has said it would take to the courts its motion to hold an extraordinary general meeting and put shareholder support for Mr. Burgmans to the vote.

But these moves wouldn't change the legal endgame, which gives the supervisory board an effective veto. "The fact this can be dragged out works in favor of Akzo," says Edmund Schuster, assistant professor of law at the London School of Economics.

As PPG has recognized, merging with Akzo would make a lot of business sense--and create a lot of value for shareholders--in the capital-intensive, low-growth paint industry. The question is how much value is destroyed as management is distracted by the fight. PPG would be forgiven for concluding its time is more profitably spent elsewhere.

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

(END) Dow Jones Newswires

May 08, 2017 09:56 ET (13:56 GMT)