Morningstar | Corporate Action: Recommend Vote in Favour of Nippon’s Scheme of Arrangement To Acquire Dulux. See Updated Analyst Note from 17 Apr 2019
We recommend shareholders vote in favour of Nippon Paint Holdings Co’s, or Nippon’s, all cash takeover offer of AUD 9.80 per share to acquire 100% of narrow-moat DuluxGroup’s outstanding shares. The deal appears generous and represents a 28% premium to Dulux’s closing price on April 16, 2019. We fully anticipate Nippon will be successful given the substantial deal premium and a relative absence of anti-trust or funding issues that could stymie the proposal. Therefore, we raise our fair value estimate to AUD 9.80, in line with Nippon’s offer. A Dulux shareholder vote on the scheme is required and will likely proceed in late July 2019.The AUD 9.80 offers implies an enterprise value of AUD 4.2 billion for Dulux, which at 15.8 times our fiscal 2019 EBTIDA estimate appears rich. Comparing favourably with our stand alone estimate of enterprise value of AUD 2.7 billion, and at a 63% premium to our equity valuation of AUD 6.00 per share, the deal is a great outcome for existing Dulux shareholders. We also view the timing as ideal. With the Australian dwelling investment cycle having peaked in 2018, we retain our view that risk to Dulux’s earnings are skewed to the downside. With this risk not fully-priced in, in our view, Nippon’s top-of-cycle proposal appeals all the more.
We fully anticipate the deal closing following the Dulux shareholder vote in late July 2019. While the scheme remains subject to approval by the Australian Foreign Investment Review Board and the Overseas Investment Office of New Zealand, such approvals are unlikely to impede. Nippon intends to use debt to fund the deal, which will see its healthy balance sheet, which currently sits in a net cash position, move to an approximate JPY 264 billion net debt position. But this appears manageable, representing a net debt/EBITDA ratio of 2.3 times (trailing 12 months). With Nippon’s gearing post deal closure largely in line with global paint industry peers, funding is unlikely to be obstructive.
DuluxGroup is engaged in the manufacture, marketing, manufacture, marketing, sale and distribution of branded paint, coatings, adhesives, garden care and other building products to the residential home improvement, commercial and infrastructure markets across Australia, New Zealand and Papua New Guinea, China, South East Asia and the U.K. Co. supplies paints and coatings under the Dulux brand; consumer and construction products under the Selleys and Parchem brands; cabinet and architectural hardware under the Blum, Hera, SecureView, Assa Abloy and Breezway brands; and Yates garden care and home improvement products.
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