Valspar and Sherwin-Williams Get a Second Request



Antitrust regulators take a closer look

On May 11, after the Market closed, Valspar (VAL) and Sherwin-Williams (SHW) announced that they received a “second request” from the FTC (Federal Trade Commission) regarding their merger. This means that regulators asked for additional information. It stops the clock on the 30-day review. The net effect of this will elongate the timeline for the transaction and increase the risk. This is negative for Valspar stock. It’s being bought for $11.3 billion or $113 cash per share. To learn more about the deal, read Big Deal in the Paint Sector: Sherwin-Williams Buys Valspar. That said, the companies were guiding for a year to close the transaction. So, they had a good chance of a second request.

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The companies are cooperating with the FTC. They still anticipate closing the deal by 1Q17. This is a combination of the third and sixth players in the paint space, although the companies refer to the transaction as “complementary.” They obviously anticipated some antitrust risk. In the merger agreement, they spelled out exactly how far they’re willing to go in order to get antitrust approval. There’s a $1.5 billion cap on divestitures. Sherwin-Williams won’t agree to sell its Krylon or Ronseal brands. If the required divestitures are above $650 million, then the consideration drops to $105 per share.

Given all the pain in the merger arbitrage sector lately, with the Baker Hughes (BHI)-Halliburton (HAL) deal and the Pfizer (PFE)-Allergan (AGN) deal breaking, we should see some selling of Valspar tomorrow.

Other merger arbitrage resources

Other important merger spreads include the Dow Chemical (DOW)-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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