Akzo Nobel, Axalta talks could draw antitrust scrutiny over powder coatings

AkzoNobel

13 November 2017. By Andrew Boyce.

Investors tracking Akzo Nobel’s merger talks with Axalta Coating Systems would do well to remember that antitrust regulators have spent years probing their industry, segment by segment.

A competition review of any deal between the two will soon show that they produce competing products. The upshot could be potentially lengthy investigations at the European Commission and elsewhere.

The combination might not stoke the “extensive antitrust concerns” that Akzo Nobel cited in rejecting a $29 billion takeover bid by PPG Industries in June. But it might rouse suspicions that an Akzo Nobel-Axalta merger could reduce choice and push up prices for certain coatings used in construction and manufacturing.

Given the history of mergers and cartels in the coatings and chemical business, it would be wrong to assume that regulators will just wave the deal through.

Under pressure

Akzo Nobel confirmed on Oct. 30 that it was engaged in talks with Axalta about “a merger of equals.” The Dutch manufacturer said these discussions wouldn’t affect its plan to split off its specialty chemicals business.

The two operations come at a time when Akzo Nobel has been under steady pressure from Paul Singer’s Elliott Management and other investors, who railed against the company’s refusal to countenance PPG’s overtures.

The coatings business is well known to EU competition officials, who have reviewed hundreds of mergers in the industry down through the years, including four in 2016 alone.

The latest two involved Akzo Nobel buying a business from BASF of Germany and BASF, in turn, acquiring some operations from US chemical maker Albemarle.

Powder coatings

The commission’s findings on Akzo Nobel’s buyout of BASF Industrial Coatings last year have direct bearing on the Dutch company’s current merger talks with Axalta. The conclusions — laid out in a formal EU decision to approve the deal — are particularly telling when it comes to powder coatings.

Powder coatings are used in a dry process to create hard finishes on products ranging from home appliances to cars and buildings. Akzo Nobel and Axalta are the two biggest manufacturers of these coatings in Europe, controlling about 40 percent of the market, the commission notes in the BASF review.

Akzo Nobel’s powder coatings were used in the Shard skyscraper in London and the roof on Wimbledon Centre Court. Axalta’s were applied in a modernistic extension of the EU’s Court of Justice in Luxembourg.

In 2015, Akzo Nobel commanded a share of between 20 percent and 30 percent in Europe’s market for powder coatings, both by volume and value, the final decision said. Axalta’s comparable share stood between 10 percent and 20 percent, it said.

Other competitors

The companies did face competition in the market from Norwegian paint and coatings maker Jotun; Valspar, which has since been taken over by Sherwin-Williams; and Tiger Coatings, the commission found. They also competed with a “number of small local competitors,” its decision said.

But Akzo Nobel was the “leading player” in the European powder coatings market, and industry players “considered Axalta . . . to be the closest competitor to Akzo Nobel,” the decision said.

The commission concluded that Akzo Nobel’s acquisition of BASF Industrial Coatings wouldn’t harm competition in the market for powder coatings because of the “strong competition” the Dutch manufacturer faced from “Axalta and local suppliers.”

A merger between Axalta and Akzo Nobel would clearly change this dynamic.

Annual report

Axalta’s 2016 annual report supports the view that Akzo Nobel is one of its top rivals in the coatings business. Akzo Nobel, BASF, PPG and Valspar figure among Axalta’s multinational competitors in the market for industrial coatings, the report says.

Akzo Nobel competes with Axalta for coatings it sells to automobile repair shops and customers in several other industries, the report says. Axalta is “one of only a few” manufacturers capable of supplying these coatings, which need to be durable and match the color of original vehicles, it says.

The report also lists Akzo Nobel as one of Axalta’s “primary competitors in the refinish end-market.” Other lead rivals in that business include PPG and BASF, it says.

None of this will be news to EU regulators, who know the coatings market inside out.

Shares in Akzo Nobel trade on Euronext Amsterdam. Axalta is listed on the New York Stock Exchange.