How Will Arbs Impact the Valspar and Sherwin-Williams Deal?



Arbs will probably want to have some of this deal in their portfolios

While this deal does have antitrust issues, it isn’t as problematic as some of the other deals out there. For starters, it appears that Sherwin-Williams is the third player in the industry. Valspar is the sixth player. In terms of Herfindahl numbers—see the basics of merger arbitrage article below for an explanation. A sixth and third transaction usually isn’t problematic. Note that the reduced consideration doesn’t even kick in until $650 million. This would represent over 15% of Valspar’s 2015 revenue.

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The takeover multiples certainly aren’t challenging compared to comparable transactions. They’re less than half of the comparable multiples. We’re starting to see more competitive bidding situations, specifically in the Starwood-Marriott deal as well as the Affymetrix-Thermo Fisher deal. Could a PPG or Akzo Nobel step in and outbid Sherwin-Williams? It’s important to note that 6.6x EBITDA (earnings before interest, tax, depreciation, and amortization) isn’t out of the realm of possibility for a private equity buyer. Access bought Lyondell for 0.8x revenue and 7.7x EBITDA. While this wasn’t a pure private equity deal, Access held Basell, it would tempt other buyers to run the numbers.

If the deal closes as advertised, you’re getting a 10% plus return. If regulators demand $650 million in divestitures, you still get a 2.8% return. This is still positive. If regulators demand $1.5 billion in divestitures, which is over 1/3 of Valspar’s 2015 revenue, you have about $18 downside from here. It probably isn’t a bad risk to get almost $10 with the possibility that someone might come in over the top.

Other merger arbitrage resources

Other important merger spreads include the Dow Chemical (DOW) and DuPont (DD) deal. It’s slated to close in 2H16. The Apollo-ADT (ADT) merger is another important deal. For a primer on risk arbitrage investing, read Merger arbitrage must-knows: A key guide for investors.

Investors who are interested in trading in the retail sector should look at the Materials Select SPDR (XLB).


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