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A Closer Look at the SW/Comex Deal

From Canada to Panama, SW is now the largest paint manufacturer in North and Central America. On November 12, the Sherwin-Williams Company (NYSE: SHW) announced that a definitive agreement had been reached to purchase Consorcio Comex, S.A. de C.V. for 2.34 billion. We have not seen many paint manufacturer acquisitions lately, so the SW/Comex deal seems a little abrupt. SW is a well run fortune 500 corporation with a tradition of profit and growth through buying companies. Essentially, over the last twenty years or so, SW and ICI bought most of the major US paint companies and then Azko Nobel, with very little US presence, swooped in and swallowed ICI. Although one national company went in another direction, Berkshire Hathaway purchased Benjamin Moore Paints, which was somewhat of a surprise since BH had not been in the national paint business.

SW operates through four segments: Paint Stores Group (known as Sherwin-Williams Stores), Consumer Group, Latin America Coatings Group, and Global Finishes Group. The stores group, most familiar to contractors, sells Sherwin-Williams branded architectural paints and coatings, industrial and marine products. The stores group 2011 sales were 4.78 billion accounting for the lion’s share of overall profits and total company sales were 8.77 billion. Under Chris Connor’s stewardship, SW has exceeded investor projections with record sales and earnings. SW Mexico has 109 branches and 200 dealers.

The Comex Group is a first rate, world-class company. It is a tightly held Achar family operation that grew enormously under the leadership of Marcos Achar Levy, the CEO. Comex also expanded through acquisition and entered the US and Canadian markets with the purchase of five brands; Color Wheel, Frazee; Kwal Paint; Parker Paints and General Paint of Canada. Later and in 2008, Comex bought two more companies, Para Paints and Crown Diamond Paints (both Canadian), from ICI before the Azko Nobel/ICI closing and because of a regulatory opportunity allowing for the acquisition.

The Comex purchase is reportedly a cash deal with SW using a mixture of bonds and cash for financing. In addition, SW will assume Comex debt. After the announcement, the market indicated approval by the rise of SW’s stock price to $157.99 (by publishing deadline), near the 52 week high of 159.50 – and it helps that SW’s 3rd quarter profits were monster too. When considering bold moves, this is a very strategic way for a large company to grow. Already number one in the US, it would have taken years to garner the Comex company sales of Color Wheel, Frazee, Kwal, and Parker Paints. And SW has been in Mexico since 1929, but uncharacteristically remained an also ran, while Comex founded in 1952 (celebrating its 60th year), is number one.

Comex may manufacturer and sell more items, as well as a wider selection, than SW stores. One item that took a bold leap of faith to go into was gypsum wall panel manufacturing. Traditional Mexican construction makes use of more stucco and masonry type systems versus the American gypsum and EIFS panel assemblies. Around 2005, Comex entered the wall board manufacturing business with a minority partner, Lafarge, an international corporate giant, which operates in 75 countries. It made sense for Comex to diversify once sales growth slowed; already number one in Mexican paint sales, and the main competition was SW and Home Depot, (both of which did not allow for acquisition expansion). Investing into wall board manufacturing must have been a substantial undertaken, perhaps as much as 250 million.

The pros were that Comex had 2,000 plus stores in Mexico with more throughout Central America (more than 3,000 total) so there could be lots of wall board distribution and revenue. The cons were that other players including the Home Depot were already entrenched and workers must be put aside the old masonry ways for newer construction techniques. Of course lots of larger, commercial projects had already switched to panel assemblies, but the Comex brand was well recognized and logically, it was in line with application; most walls constructed get paint. It will be interesting to see how SW handles the wall board manufacturing part of Comex or even if that is part of the acquisition.

In addition, there are several other features that Comex offers SW; the thorough knowledge of their market (the culture is different), the brand recognition is prominent, the paint sales gross profit margin is high (there are few discounts; unlike in the US where multiple levels of price are based on volume or large project bids), and the small store concept. Comex stores are tiny and do not stock most items, but almost anywhere in Mexico benefits from next day delivery for 10,000 plus items. Comex’s logistics out perform US paint manufacturers; thousands of daily store orders are fulfilled with cutting edge high technology.   If somehow, SW were to adapt that style of delivery here, it would be a game changing move (although the geography is much smaller in Mexico).

Generally, SW handles acquisitions very well (unlike ICI did), but whether or not the Color Wheel, Frazee, Kwal, and Parker paint brands survive the next few years is another question. It makes good business sense that the Comex brand will continue in Mexico. Most likely SW’s future purchase growth will be international. The deal is scheduled to close in January. PPT will report any new details as they become available and if regulators require any brand diversification.

Sherwin-Williams Company

USA

Paint Companies
Color Wheel
Columbia Paints
Duron
Dutch Boy Paints
Frazee
MAB Paint
Martin Senour
Mautz Paint Co.
Parker Paints
Pratt & Lambert
Sears & Kmart Paints: Easy Living; Weather Beater

Specialty Companies
Bestt Leibco Brushes
H&C Concrete Stains
Krylon  Paints
Minwax
Purdy Brushes
Symphony Brushes
Thompson Wood Products
White Lightning Caulk

Canada
Paint Companies
Crown Diamond Paints
General Paint
Para Paints

Mexico and Central America

Comex

Sources:
http://investors.sherwin-williams.com/company-presentations/
http://www.answers.com/topic/sherwin-williams-company
Corporate web sites of Sherwin Williams and Comex

Comercial Mexicana De Pinturas S.a. De C.V. Comex® is a registered trademark used for Building Materials, Namely Asphalt Roof Coatings, Bituminous Roof Coatings, Tar Based Asphalt Sealants, Bitumen Based Asphalt Sealants, Tar Based Roof Sealants and Bitumen Based Roof Sealants, Texturized and Coating Materials In the Nature of Acrylic Texture Finished Pastes, Clay, Fillers and Plasters For Use In Repairing, Decorating and Protecting Surfaces Made of Concrete Dry Wall, Fiber-Cement Panels, Brick, Cement Brick and Plastered Walls, Wall and Ceiling Mortar-Based, Plaster-Based and Concrete-Based Water Texture Material For Interior Use Formulated With Excellent Adhesion Properties, Hardness and For Easy Application With Non Flammable and Non-Toxic Properties To Be Used Over Drywall, Fiber-Cement Panels, Brick, Cement Brick, and Plastered Walls.