PPG’s recent announcements that it’s evaluating whether to sell both its silica business and architectural coatings unit has left painting contractors wondering what it means for the future of the global paint giant and the overall health of the industry.
Founded in 1883 as the Pittsburgh Plate Glass Company, PPG is the No. 2 paint manufacturer worldwide, second only to Sherwin-Williams. PPG operates in more than 70 countries – including the U.S. and Canada – and reported annual revenue of $18.246 billion in 2023, a 5.06% increase from 2021.
After the surprise news last week, PPG seems eager to do damage control and reassure customers that it’s still business as usual for the architectural coatings unit.
“We remain committed to serving our customers with the same trusted team and trusted products,” said Jaime Irick, senior vice president of PPG’s architectural traffic solutions business in North America. “Throughout the strategic alternatives review, PPG will continue to fully support Architectural Coatings customers, and we will continue to provide our customers with high-quality products and services.”
Irick pointed out that the company is still moving forward with hires in the sales department, and appearing at events like the International Builder Show, the Kitchen + Bath Industry Show, and the recent PCA Expo. (PCA owns APC Media, including Paint News.)
“Our customers’ day-to-day contacts for sales, service, and support are not changing,” Irick emphasized.
The company also cited last week’s launch of the new Speedhide Max paint as further evidence PPG is moving forward and supporting the Architectural Coatings business even as the strategic review takes place.
“At PPG, we pride ourselves on being the coatings partner that pro painters trust for quality results,” Eric Stevenson, director of product management, marketing, and pricing for the unit said in a press release. “We are excited to add Speedhide Max paint to a family of paint products pros already know and love.”
Understanding PPG’s strategic review
The architectural coatings unit could be worth anywhere from $800 million to $1 billion, according to analysts at Barclays. Last year, the unit – which sells interior and exterior paints, stains, caulks, repair products, adhesives, and sealants – accounted for approximately 10% of PPG’s total net sales.
The business includes Glidden, Flood, and Liquid Nails, which were acquired as part of a deal to buy Akzo Nobel N.V.’s North American architectural paint business for $1.05 billion in 2013. The purchase was PPG’s second-largest acquisition in its history.
Meanwhile, PPG’s stock price is surging. In the fourth quarter of last year, PPG jumped 13.7%, outperforming the paint industry’s 10.1% rise and beating the overall S&P 500’s growth of 6% over the same three-month period.
While PPG has given back some of its prices in the first quarter of 2024, it’s hardly a calamity that would call for breaking up the business.
So what’s going on?
First, it’s important to understand that companies divest units of their business for all kinds of reasons. Divestment can be used to generate additional cash for future purchases, or because the unit no longer fits within the company’s core offerings and therefore doesn’t offer a strategic advantage from economies of scale.
Indeed, PPG CEO Tim Knavish hinted as much in the press release announcing that Goldman Sachs has been brought in to help PPG shop the division.
“We will assess whether some or all of the business could be better suited to grow faster with a partner or different owner, or may be better suited to operate as a core business within another company, as a standalone entity, or in a joint venture,” Knavish said.
According to the Harvard Business Review, there are four key rules for a company to follow to effectively evaluate and execute a divestiture:
- Set up a dedicated team to focus on divesting – devoting the same rigor and planning as they would to acquisitions.
- Avoid holding onto businesses that are not core to their portfolio – no matter how much cash they may generate.
- Create a robust de-integration plan – establish boundaries to delineate the unit for sale from the rest of the remaining business.
- Provide a compelling logic for buyers and employees – maximize the value of the business while clearly explaining why divesting makes sense.
That seems to be the playbook PPG is following. Said Irick: “I want to take this opportunity to reinforce that there is no assurance that PPG’s strategic review of its architectural coatings business in the US and CAN will result in a transaction.”
Fallout from PPG’s strategic review
Yet putting the business up for bid is not without risk.
“A strategic review that ends in a ‘no deal’ after disclosing these financials could actually likely weigh on the story/multiple,” Barclays wrote, noting that PPG is harder to value due to the uncertainty around the future of its paint business. “We do think it’s the correct, albeit painful, decision for PPG leadership to take.”
In light of those factors, Barclays downgraded its rating on PPG to Equal Weight from Overweight, and cut its price target to $149 per share from $163. PPG trades at a price-to-earnings multiple of 17.5 times, down from 19 times earnings.
The decision to put the architectural coatings unit on the auction block follows an announcement in January that PPG had brought in Morgan Stanley & Co. LLC as financial advisors to review alternatives to its silica products business, which dates back to the 1930s.
PPG’s silica business employs 350 workers, largely in the Netherlands, with small facilities in Barberton, OH, and Monroeville, PA. The division provides materials for everything from tires to thickening and anti-corrosion additives for paints and coatings. It is estimated to account for between 1-2% of PPG’s annual net sales.
“As we have done consistently, we will continue our ongoing strategic assessment of all our businesses, ensuring each business continually delivers increased value for our customers and shareholders and fits the growth investment strategies for the company,” CEO Knavish said in the January press release.
PPG has closed numerous stores across North America as it tries to fend off fierce competition from Sherwin-Williams.
This has already been a year of major change in the paint industry. In addition to PPG’s silica and architectural coatings announcements, 2024 also brought news that Kelly-Moore Paints would abruptly close the shop and lay off its 700 employees.
In that case, Kelly-Moore was significantly hamstrung by legal issues from its use of asbestos in cement and texture products. The company had already paid out $600 million in claims and faced an additional $170 million in litigation on the books. Those liabilities likely scared away any potential suitors and left Kelly-Moore with no choice but to shut down.
All of this leaves professional painting contractors scrambling to source replacement products and wondering what will be the next major domino to fall. Stay tuned to Paint News as we track these fast-moving developments in the industry.
