"On a positive note, the portion of the [Comex] transaction we did complete ... are on track to deliver outstanding returns to our shareholders over a relatively short timeframe," Chairman and Chief Executive Chris Connor said.
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Sherwin-Williams Chairman and CEO Chris ConnorLisa DeJong, The Plain Dealer
"After 18 months of effort behind this acquisition, it is an understatement to say that we're disappointed with the conclusion," Connor told analysts on Thursday.
Comex, a 61-year-old, family-owned company, is Mexico's largest paint retailer in terms of stores and market share, selling paint via 3,300 stores operated by 750 concessionaires, which are comparable to franchisees here in the U.S. Acquiring Comex would have doubled Sherwin-Williams' store count in North America and been the largest acquisition in the $10.2 billion Cleveland company's history.
The Mexican commission, called Cofeco, had been widely expected to approve the transaction, as its U.S. and Canadian counterparts had done. But instead, it voted against the deal twice, citing concerns about the U.S. company buying up Mexico's largest paint company and hurting smaller competitors.
Sherwin-Williams went ahead and bought the smaller U.S. and Canadian divisions for $165 million on Sept. 16, but continued to pursue the much larger Mexican operations.
When the deal wasn't consummated by the March 31 deadline, either side was free to terminate the agreement. But the sellers, Avisep, S.A. de C.V., and Bevisep, S.A. de C.V., who own all of Comex's outstanding shares, went one step further, telling Sherwin-Williams on April 1 that it had breached its obligation "to use all commercially reasonable efforts" to win over the Mexican authorities.
Sherwin-Williams said it was surprised by the charges, because it had spent the month of March working closely with Comex to satisfy the conditions of Mexican antitrust regulators (Comision Federal de Competencia).
On April 3, it filed a complaint with the New York State Court seeking a judgment that it had not violated its agreement and also told Comex that it was "rejecting all the allegations" and terminating the purchase agreement.
"This action was entirely defensive on our part," Connor said on Thursday. "We could not allow an allegation" like that to stand "without an appropriate response."
Previous Plain Dealer stories:
April 6, 2014:Sherwin-Williams ends its pursuit of Consorcio Comex's Mexican division
Jan. 30, 2014: Sherwin-Williams sold $10.2 billion worth of paint in 2013, still optimistic about buying Consorcio Comex
Nov. 1, 2013: Sherwin-Williams meeting with Mexican authorities who voted against its Comex acquisition plans
Sept. 16, 2013:Sherwin-Williams buys Consorcio Comex's U.S. and Canadian business, still hopeful about Mexican division
July 18, 2013:Sherwin-Williams is still optimistic about acquiring Comex, despite Mexican regulators' concerns
June 1, 2013: Why Cleveland paint company Sherwin-Williams is on pace to become a $10 billion company
Nov. 12, 2012: Sherwin-Williams buys Mexican paint company for $2.34 billion
In court documents, Sherwin-Williams said it received notice of the accusations "one week after Consorcio Comex's Chief Executive Officer informed Sherwin-Williams General Counsel that Sherwin-Williams had 'complied 100 percent with the remedies asked' by the Mexican Antitrust Commission and that the Mexican Antitrust Commission was taking a 'crazy' and 'stubborn' position regarding the terms under which the Mexican Antitrust Commission would authorize the transactions outlined in the agreement."
When the commission told Sherwin-Williams after its second rejection of the deal that the company needed to pursue "certain remedies, including potentially divesting a portion of its business," to gain the needed authorization, Sherwin-Williams took it seriously.
Sherwin-Williams said in documents that it "hired an investment banker, set up a data room, and solicited and vetted bids to sell a portion of its Mexican operations to a third party." It even drew up a letter of intent to sell a portion of its operations to a third party, on the condition that the Mexican authorities grant approval of the Comex deal. But it never got that approval.
"At this point we do not know how long this legal process will take, but both parties agree the termination is final and we are moving on," Connor said on Thursday.
"On a positive note, the portion of the transaction we did complete -- 306 company operated paint stores and eight manufacturing sites in the United States and Canada -- are on track to deliver outstanding returns to our shareholders over a relatively short timeframe," he added.
For the first quarter of 2014, its consolidated net sales grew 9.2 percent, or $199.4 million, to a record $2.37 billion. That growth was primarily from higher paint sales and acquisitions.
Net sales at stores open at least a year, an important retail metric called same-store sales, increased 7.9 percent.
Net sales in the paint stores grew 16.4 percent to $1.36 billion because of higher architectural paint sales for homes and buildings.
Diluted net income per common share increased 2.7 percent to a record $1.14 per share.
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Sherwin-Williams this month ended an 18-month-long effort to acquire the Mexican operations of Consorcio Comex. But it remains the largest paint retailer in North America, with 3,925 stores in the U.S., Canada and the Caribbean.Lisa DeJong, The Plain Dealer Sherwin-Williams opened 17 net new stores during the first quarter, and expects to open 80 to 90 in 2014. The company has 3,925 stores today versus 3,529 stores this time last year, Connor said.
The company expects sales to grew 8 percent to 14 percent in the second quarter, and earnings-per-share of $2.80 to $3.00. Comex's U.S. and Canadian business is expected to contribute $123 million to $135 million in the second quarter and reduce diluted net income per common share by 10 cents per share.
For 2014 as a whole, the company is forecasting net sales to increase 8 percent to 13 percent, and earnings per share of $8.12 to $8.32 per share, compared to $7.26 per share in 2013.
The company's board of directors has approved a quarter dividend of 55 cents per share, up from 50 cents per share last year.
Sherwin-Williams' shares opened at $193.45 (more than $1 over Wednesday's close of $192.25) and touched $200 per share in intraday trading before closing at $197.59, up 3 percent, or $5.34.
"We remain optimistic that the U.S. residential demand for architectural paint will strengthen as we get into the prime selling season," Connor said. "We are encouraged by early signs of a more robust commercial recovery."
Robert Wells, senior vice president of corporate communications and public affairs, agreed. "We get timely robust feedback from our contractor customers and a lot of this feedback lately has been about bidding activity and order volume. And suffice to say, commercial contractors are clearly busier and more optimistic than they were this time last year."
View full sizeSherwin-Williams Chairman and CEO Chris Connor