Sherwin-Williams meeting with Mexican authorities who voted against its Comex acquisition plans

"Our next step will be to meet in person with members of the commission, including the chairwoman, in an effort to determine if there are sufficient grounds for us to re-file (for approval)... after which we will be able to determine our next steps."

CLEVELAND, Ohio -- The Sherwin-Williams Co. said today that it is not giving up on its hopes of acquiring Mexican paint company Consorcio Comex, S.A. de C.V., and plans to meet next week with members of the Federal Economic Competition Commission that voted against the $2 billion-plus transaction.

The Comex acquisition, first announced on Nov. 12, 2012, would be the largest acquisition in company history -- and is a key part of the company's plans to expand its architectural paint business in North and South America. Comex is the second-largest paint company in the Western Hemisphere after Sherwin-Williams, and owning it would give the Cleveland company access to markets where it has few of its own paint stores.

The commission, called Cofeco, on Tuesday night rejected the proposed transaction by a 6-0 vote, the second denial in four months.

"Needless to say, we are disappointed in the commission's recent ruling denying approval," Chairman and Chief Executive Chris Connor told analysts this morning. "'Frustrated' and 'confused' would also be appropriate adjectives to use as well. Obviously the regulatory process is often unpredictable."

"The management team at Sherwin-Williams takes great pride and care in providing accurate guidance," he said. "Our nature has never been to over-promise and then under-deliver -- quite the contrary. In this matter, we missed the mark."

Because the new regulatory review process does not allow for an appeal of the decision, "the only viable path forward from here would be to re-file the transaction with the commission, including remedies that would satisfy their concerns and be acceptable to us and the seller," he said. He declined to say what remedies Sherwin-Williams has offered or would consider as part of the deal.

"To that end our next step will be to meet in person with members of the commission, including the chairwoman, in an effort to determine if there are sufficient grounds for us to re-file... after which we will be able to determine our next steps."

Connor said the company will not be sharing details about the outcome of that meeting or what it decides to do next until the company's year-end conference call. "Given the fluid nature of these confidential dealings, it would not be appropriate, nor do we intend, to provide regular updates on our progress," he said.

A combined entity detrimental to competition

In a ruling that went on for more than 300 pages in Spanish, 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 nearly 50 percent of the market, it would be about eight times larger than its next largest competitor, the commission said.

"The decision of the commission is based upon their belief that the market share of the combined entity would be detrimental to competition," Connor said.

"The commission found for a variety of reasons that there would not be sufficient competitive pressure in the market following the consummation of the transaction. They also believed the transaction would make it more difficult for competitors to enter the market on a timely basis."

Comex, a family-owned paint retailer founded in 1962, sells paint via 3,300 stores operated by 750 concessionaires, which are comparable to franchisees here in the U.S. Sherwin-Williams, in comparison, operates 3,868 company-owned paint stores. The iconic Comex brand has the same kind of name recognition and brand loyalty in Mexico that Sherwin-Williams has here in the U.S. and Canada, with a slightly larger market share.

When Mexican regulators rejected the deal for the first time by a 3-2 vote in July, Sherwin-Williams officials were shocked and surprised. "Immediately following that ruling, we began discussions in earnest regarding remedies that would address their concerns and win the necessary approval," Connor said. "I would characterize these discussions as open, honest, transparent and productive."

In filing its appeal, "we believed that we had indeed fashioned a remedy that restored the market to its pre-transaction competitiveness, and had received positive comments from the staff at the commission confirming this opinion."

Connor said the company has repeatedly voiced optimism about being able to close the deal, based on its own internal careful analysis and repeated reassurances from a number of advisers, including the respected international investment bank Comex hired to help it sell their company.
 

"Likewise, the family and management team at Comex, whom we have enormous respect for -- not the least of which is the work they've done to build a remarkable company over the past 60 years -- brought their own knowledge of the Mexican market, as well as their own government's process in these matters. And they believed, as we did, that this deal would win approval," he said.

In addition to its own in-house counsel, "we retained the best local counsel in Mexico City to represent us in front of the commission, a firm with a very successful track record to their credit in Mexico," he added. "The senior partner actually helped design the regulatory review process we've been navigating, and they, too felt, we had excellent arguments and should expect an approval."

Connor said he and other Sherwin-Williams executives "spent countless hours in Mexico" meeting with the commissioners and their staff about their proposal.

"We haven't given up yet"

On Sept. 16, the company went ahead and bought Comex's U.S. and Canadian divisions, including 306 retail paint stores, for $90 million in cash and the assumption of Comex's liabilities, valued at about $75 million. The divisions generate annual sales of about $500 million.

Sherwin-Williams told analysts on Friday that those store are expected to add $95 million to $105 million in sales to the company's fourth quarter.

"We haven't given up yet," Connor said. He said the company is thrilled with the U.S. and Canadian businesses, and "getting the Mexican piece of this was going to icing on the cake. But if this is as far as we get, we've really strengthened the company" by adding that part of Comex.

Sherwin-Williams has a contractual agreement with Comex through March 31, 2014, but if the Mexican deal isn't consummated, it has a number of other targets in Latin America that it might pursue, or it could also open up more Sherwin-Williams stores in those regions, "so we're not without options and opportunities," he said.

The company's shares fell $3.33, or 2 percent, to close at $184.67. Its share price has dropped $10.40 since the $195.07 it posted after last Friday's record third-quarter earnings report.

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