"There was an assumption by investors and the company that they would be able to get through this appeal process and this deal would get done one way or another, but now that doesn't look as likely," said Ivan Marcuse, equity research analyst with KeyBanc Capital Markets Inc.
CLEVELAND, Ohio -- The Sherwin-Williams Co. is scrambling for answers after Mexican
regulators for the second time in four months rejected its plans to
acquire rival Consorcio Comex, S.A. de C.V., the
largest paint company south of the border.
"The Federal Economic Competition Commission of Mexico informed the
Company last evening that the Company's appeal relating to its pending
acquisition of Consorcio Comex, S.A. de C.V. was denied and the
acquisition is not authorized," Sherwin-Williams said
in a short statement issued just before the markets opened on
Wednesday. "The Company is currently reviewing the Commission's decision
and is considering all options, including whether to refile with the
Commission."
The Comisión Federal de Competencia Económica, called Cofeco, on Tuesday
night decided by a 6-0 vote to reject the $2 billion deal again.
Cofeco handed down its decision via more than 300 pages, responding to
the company's appeal of its first rejection with additional concerns.
Sherwin-Williams is having that ruling translated from Spanish and said
it will hold a conference call at 11 a.m. Friday to talk about the
commission's decision and what to do next.
The bad news rippled through Sherwin-Williams' stock, which fell by more
than $8 per share before closing at $188.47, down nearly $6, or 3
percent, from Tuesday's close of $194.44. But it came on the heels of a
third straight record quarter for 2013, and an
updated full-year forecast.
The $2 billion-plus acquisition of Comex, first announced on Nov. 12, 2012, would be the largest acquisition in company history.
Comex, a 61-year-old family-owned paint retailer that sells paint via
3,300 stores operated by 750 concessionaires, has the same has the same
kind of name recognition in Mexico that Sherwin-Williams has here in the
U.S. and Canada, with a slightly larger
market share.
Equity research analyst Ivan Marcuse, a vice president of KeyBanc
Capital Markets Inc. in Cleveland, said he can't say if it's worth
continuing the pursuit, because he doesn't know enough about the Mexican
government, the competition commission or how its approval
process works.
"It looks like it's a great business, the Mexican assets of Comex," he
said. "I imagine the company is disappointed with the ruling, and I
suspect they're looking at options of what they need to do next."
"There was an assumption by investors and the company that they would be
able to get through this appeal process and this deal would get done
one way or another, but now that doesn't look as likely," Marcuse said.
Cofeco said it was blocking the deal because the resulting company would
have too large a market share in the decorative coatings industry. Not
only would Sherwin-Williams control about half the market, it would be
eight times larger than its next largest competitor,
the commission said.
Sherwin-Williams would have the largest portfolio of brands as well as
the largest distribution in the industry, creating high barriers for
other companies to enter the market.
Although the commission acknowledged that there would be some unnamed
benefits to allowing the company to close the deal, it ultimately
decided they were not worth the risks and the lack of free competition
that would be created.
This is the second time in four months that Cofeco has ruled against
Sherwin-Williams. After both its U.S. and Canadian counterparts had
granted their approval, it was widely expected that the Mexican
commission would follow suit.
Instead, the commission on July 18 rejected it by a 3-2 vote. In a
144-page decision, it expressed concerns about the largest paint
retailer in the U.S. buying up Mexico's largest paint company in terms
of stores and market share, and what that might mean for
smaller competitors.
Despite assurances by Sherwin-Williams' Chairman and Chief Executive
Chris Connor that he and Comex Chief Executive Marcos Achar would
"pursue all avenues available to secure confirmation of this
transaction," investors were alarmed. The company's share price
fell by nearly $20 per share to close at $167.94.
On Sept. 16, Sherwin-Williams went ahead and did what it had told
analysts it was not interested in doing: it bought the U.S. and Canadian
divisions of Comex and their 306 paint stores for $90 million in cash
and the assumption of Comex's liabilities, valued
at about $75 million.
Those additional stores are expected to add $95 million to $105 million in sales to the company's fourth quarter.
But company executives continued to talk about Comex in Mexico as if it
was only a matter of time before they got the answer they wanted.
Sherwin-Williams told analysts at Friday's earnings conference that even
though the commission had blocked the deal in July, things looked a bit
more promising now.
The former commission members stepped down last month, and the company
hoped that with a new commission, the outcome might be more favorable.
"Last Tuesday, the newly seated competition commission held a hearing to
consider our case," Chairman and Chief Executive Chris Connor said
Friday. "We expect their ruling within five business days of the
hearing, and both parties stand ready to complete this
transaction promptly once we receive regulatory clearance."
Marcuse pointed out that shares didn't drop as much on Wednesday as they
did in July, in part because the company has more options if the Comex
deal doesn't work out.
At the end of 2012, the company had issued $1 billion in debt at a low
interest rate in anticipation of closing the Comex deal. But if it ends
up not pursuing it, Marcuse expects the company to go into the open
market and significantly increase its share buy-back
rather than repaying that debt.
"The silver lining, if there is any, is that shareholders should still benefit from the debt issued," he said. "I would expect that the share
repurchase would be much more aggressive than it would have been had
they closed the deal. This is one of the ways the company
is able to create value for its shareholders."
Plain Dealer photographer Lonnie Timmons III and translator Kayleigh Fladung contributed to this story.
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