"We are clearly disappointed by this decision, but remain resolute in our determination to address their objections and proceed with the transaction," Chairman and Chief Executive Christopher Connor told investors on Thursday.
CLEVELAND, Ohio -- Sherwin-Williams Co. executives said they're "aggressively" reaching out to the Mexican regulators who voted against their plans to acquire Mexican paint company Consorcio Comex, and remain optimistic the deal will be consummated.
"Last evening, and again this morning, I spoke with Marcos Achar, CEO of
Comex, and he confirmed their equal resolve to pursue all avenues
available to secure confirmation of this transaction," Sherwin-Williams Chairman and Chief Executive Chris Connor told analysts this morning.
But Sherwin-Williams' optimism wasn't enough to reassure rattled shareholders, who sent shares tumbling nearly $20 per share today before they settled at $167.94, down 8 percent, or $15.25 from Wednesday's close.
The Cleveland paint company issued the short but jarring statement before the markets opened this morning saying, "Last evening the Federal Competition Commission of Mexico informed the Company that by a 3-2 vote the acquisition of Consorcio Comex, S.A. de C.V. announced on November 12, 2012 was not authorized by the Commission."
That overshadowed a second announcement that the company had rung up record sales and net income per common share for the second quarter of 2013.
The $2.34 billion acquisition of ComexConsorcio Comex, a 61-year-old, family-owned paint retailer with 3,618 stores in North America, would double Sherwin-Williams' store count in North America and be the largest acquisition in company history. The Mexican commission had been widely expected to approve the deal, as its U.S. and Canadian counterparts had done.The commission, called Cofeco, instead expressed concerns about the U.S. company buying up Mexico's largest paint retailer in terms of stores and market share and edging out smaller competitors. Sherwin-Williams has 30 days to appeal the decision.
Equity research analyst Ivan Marcuse, a vice president of KeyBanc Capital Markets Inc. in Cleveland who has followed the company for years, said he was surprised by the decision against Sherwin-Williams, "and judging by the stock reaction, I'm not the only one who was surprised."
"Right now, you'd have to say it definitely adds more uncertainty to if they're going to be able to get the deal done," he said. "It was always assumed by institutional investors and Wall Street investors" that Sherwin-Williams would get the green light to move forward.
"They have to go have discussions with the Mexican authorities to see what their issues are and what they need to do, if anything, to resolve this."
William Mahnic, associate professor of banking and finance at Case Western Reserve University's Weatherhead School of Management, said Sherwin-Williams could do what AT&T will end up doing after it acquires Leap Wireless and relinquish some of its spectrum to other competitors.
In Sherwin-Williams' case, the company could end up carving out some of the Comex paint stores in markets where it already has Sherwin-Williams paint stores, instead of buying the entire company outright.
The question is whether what's left of the company after those pieces are lopped off will still be attractive and lucrative enough to pursue the deal, Mahnic said.
But when one analyst asked during Thursday's conference call if Connor if the company had considered "a Comex deal without Mexico," Connor answered: "We remain committed to completing the full transaction, including both the Canadian, United States and Mexican side of the deal."
Mahnic said it's possible that the Mexican commission is simply taking a stand to demonstrate that it is looking out for one of its well-regarded companies, but that it will eventually approve the transaction. "This may be a short-term setback," he said.
"It doesn't make sense for Mexico to draw a fence around certain industries," he added. Mexican authorities must realize that welcoming a global competitor like Sherwin-Williams will end up making its own manufacturers and retailers better in terms of what they make and sell, to compete with the new rival, he said.
"Most emerging markets realize that" welcoming foreign investors helps "make sure that your domestic industries are as well prepared as possible to compete internationally."
Mexican consumers already have a strong affinity for American brands. "They watch American TV, and they want the brands that Americans wear and that Americans use," Mahnic said.
Still, if for some reason, Sherwin-Williams isn't able to satisfy the Mexican commissioners and the deal falls through, it doesn't hurt either company in the long term, Marcuse said. Sherwin-Williams could always use the money to make another high-quality acquisition, buy back shares from investors or otherwise invest in the company.
"There have been multiple deals that have been nixed by U.S. authorities over market share, and some companies will not even pursue an acquisition because they know there's going to be an approval process to go through," he added.
In addition to the Comex news, Sherwin-Williams said its net sales for the second quarter rose 5.5 percent, or $140.9 million, to a record $2.71 billion, compared to $2.57 billion last year.
Results were driven by its paint stores (up 8 percent to $1.61 billion), global finishes groups (up 3 percent to $513.5 million), and Latin American coatings group (up 6.3 percent to $199 million).
Net sales at stores open at least a year, called same-store sales, rose 7 percent.
For the three months that ended June 30, net income increased 13 percent to $257.3 million, from $227.8 million for the second quarter of 2013.
Diluted net income per common share increased 13.4 percent to a record $2.46 per share, up from $2.17 per share last year.
For the third quarter, Sherwin-Williams expects sales to grow 6 percent to 9 percent and earnings per share of $2.55 to $2.65 per share. For the full year, it expects earnings-per-share of $7.45 to $7.55.
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