Sherwin-Williams agreed to acquire Valspar for more than $9 billion, a 35% premium to Valspar's closing price at the time of the announcement.
Last week, Valspar reported fourth-quarter fiscal 2016 earnings of $1.37 per share, 13 cents below the consensus estimate. Revenue fell 3.8% to $1.11 billion. The company said 10 cents of the miss was from one-time costs of the merger, such as restructuring costs, legal costs and other asset related charges.
The earnings miss shouldn't affect the merger between Valspar and Sherwin-Williams. The deal appears ready to close by the end of the first quarter (in April). The combined companies will have an estimated 45% of the market for architectural paints in the United States. Sherwin-Williams operates 4,141 stores and has a plan to reach over 5,000 stores by adding 100 to 125 stores per year.
Valspar operates 57 manufacturing facilities across 20 countries on 6 continents. The company reports in two segments: paints and coatings. In paints, the company had sales of $1.5 billion in fiscal 2015. Approximately 62% of paint sales were from home centers, mass merchants and independent hardware stores. The rest of the company's sales were from outside the United States in places like Australia (15%), China (14%) and Europe (9%).
Valspar's coating business had 2015 sales of $2.5 billion. It services the packaging needs of the beverage, food and packaging industry. Packaging was 33% of revenue, industrial was 30% of revenue, and coatings for manufactured products was 20% of revenue.
The combined company would have revenue in excess of $15.6 billion, about $1.4 billion more revenue that its next closest competitor PPG Industries (PPG) . Approximately 76% of revenue would come from the U.S., while 24% would come from overseas.
The global paint and coatings business is worth about $120 billion a year, and North America represents just 19% of the total. The two big opportunities for the merged company are Asia Pacific, at 42% of the worldwide demand, and Europe, which represents 27% of the global demand for paint and coating.
The merged company believes it can save as much as $280 million by 2018. About 45% of the savings would come from lower raw materials cost, as the company is able to buy larger volumes of raw inputs. About 42% of the expense reduction would come from lower selling, general and administrative expenses (i.e. layoffs). Over the longer term, the company believes it can save as much as $320 million by combining the companies. The merger would immediately be accretive to earnings.
It's hard to put a value on the combined company right now. The consensus estimate for fiscal 2017 is $13.67, up 5.6% on $12.41 billion in revenue, but that doesn't include the merger with Valspar. Sherwin-Williams doesn't report earnings until Jan. 26, so I would expect more earnings guidance and analysts to update their models shortly thereafter.
Simply combining the companies, Sherwin-Williams should have revenue of $15.6 billion and earnings per share of more than $14. Using those rough estimates, I think the stock will trade between 18 times and 21 times forward estimates or $260 to $295 per share.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.