Dutch chemicals group AkzoNobel is selling its struggling North American decorative paints arm to U.S. rival PPG Industries for $1.1 billion to focus on its larger European and faster-growing businesses.
The sale is the latest move by the world's biggest paints maker to address problems it inherited through its 8.1-billion-pound ($13.1 billion) acquisition of Britain's Imperial Chemical Industries (ICI) in 2008.
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The North American business, which sells the Glidden paint brand in the United States, has long been a drag on AkzoNobel because it lacked the scale to compete with market leader Sherwin-Williams , and only recently became profitable.
Shares in AkzoNobel, which in October announced a 2.5-billion-euro ($3.3 billion) writedown on its purchase of ICI due to a weak global economy, surged more than 5 percent on Friday, the biggest rise by a European blue-chip stock <.FTEU3>.
"In our view, AkzoNobel took full advantage of an improving U.S. housing market, in combination with a delivering restructuring program, to divest a business which would have never been a very strong business for AkzoNobel," Rabobank analysts said in a research note.
However, ING analyst Fabian Smeets was disappointed by the price, which he said equated to 0.7 times enterprise value-to-sales, below other deals in the sector at around 1 times.
"In our view AkzoNobel has sold a significant part of its longer term upside for a relatively low price," he said.
The deal will strengthen PPG's challenge to Sherwin-Williams. According to analysts, Sherwin-Williams has around 36 percent of the U.S. decorative paints market, followed by PPG with around 15 percent and AkzoNobel on around 13 percent.
AkzoNobel chief executive Ton Buechner, who returned to work from medical leave a week ago, said the Dutch group decided to sell the business because it would have required too big an investment and too much time to make it a significant player.
"Decorative paints in North America is slightly positive this year in our expectation," after taking four years to turn around, Buechner told reporters on a conference call.
AkzoNobel, best known in Europe for its Dulux paint brand, said it would receive cash proceeds of about $875 million and would use them to pay down debt and fund growth elsewhere.
Buechner plans to update investors on his strategy for AkzoNobel on February 20 alongside fourth-quarter results.
Last year, AkzoNobel's North American decorative paints unit had revenue of $1.5 billion, about 7 percent of the group total.
AkzoNobel will still have a strong presence in North America in its other business areas - in performance coatings such as those used for cars, aircraft and ships, and specialty chemicals such as those used in the pulp and paper industry - with revenues of over $2.7 billion and close to 5,000 employees.
The sale was announced just days after Buechner, 47, returned to work after suffering from exhaustion. He said the deal came together in the third quarter while he was on leave.
AkzoNobel plunged to a 2.4 billion euro net loss in the third quarter due to the writedown on its purchase of ICI.
It warned at the time that it was looking for more cost cuts on top of the 500 million euros of savings announced last year to cope with weak consumer and construction markets.
(Reporting by Gilbert Kreijger and Sara Webb; Editing by Helen Massy-Beresford and Mark Potter)