PPG says it will not split paint business operations
Coatings firm will stay course, despite losses
PPG said it will not split its two paint segments — a move called for by an activist investment firm that has pushed for changes to drive up value at the Pittsburgh coatings company.
It is also looking to cut $125 million in annual costs through steps that could include exiting lowprofit and smaller business units.
PPG on Tuesday disclosed the results of a strategic review it undertook after shareholder Trian Fund Management, led by activist investor Nelson Peltz, pushed for operational and management changes last year.
Reports from two independent advisers and PPG’s own evaluation determined “that maintaining the company’s current business portfolio composition, including its architectural and industrial coatings businesses, provides the best opportunity to maximize long-term shareholder value,” the company said.
The independent studies were conducted by Goldman Sachs & Co. and Morgan Stanley & Co.
Trian — which holds a 2.5% stake in PPG, or about 6 million shares valued at about $675 million — also said PPG’s chairman and chief executive, Michael McGarry, should be ousted and replaced by former chairman Charles Bunch.
PPG’s board, which has stood behind Mr. McGarry, voted unanimously to keep the business intact, he said.
Trian pushed for separating the architectural and industrial coatings after PPG lost a key account with home improvement store Lowe’s.
The retailer made Sherwin-Williams its exclusive paints supplier.
PPG’s architectural paints segment — which includes house paints formerly sold at Lowe’s as well as commercial building paints and coatings for aircraft and ships — comprises about 60% of PPG’s annual sales, which totaled $15.4 billion last year.
Industrial coatings include original automotive paints and coatings used in packaging, and other industrial applications including appliances and machinery.
“By maintaining our current portfolio, we avoid negative commercial, operational and procurement impacts and preserve full strategic flexibility for the future,” Mr. McGarry said.
In a conference call with analysts Tuesday, Mr. McGarry said he is confident that by the third quarter PPG will recover from the hit it took after the Lowe’s loss.
PPG closed four coatings plants after losing the account and has since grown its relationship with home improvement chain Home Depot, he said.
PPG earlier projected it would lose $110 million to $120 million in the first half of this year because it no longer sells paints at Lowe’s.
Analysts weren’t surprised by PPG’s decision to keep its business units intact.
Frank Mitsch of Fermian Research said in a research note that rival paints makers AkzoNobel and Sherwin-Williams have made acquisitions in order for their operations to be configured more like PPG’s.
Michael Sison of Keybanc Capital Markets said in a note the strategic review didn’t see value in a split.
“We suspect the additional cost savings potential and potential divestitures could be a positive for the stock today,” Mr. Sison said.
The shares closed at $109, up just over 1 percent but well below the 52-week high of $121.29 on April 18.
Mr. McGarry said more details on the cost-cutting initiative would be disclosed when it releases second-quarter results in July.
It will result in secondquarter charges of between $185 million and $200 million, excluding some non-cash items, the company said.
Specific actions, PPG said, could include “targeted pruning” of low-profit businesses, exiting “smaller product lines that are not meeting profitability objectives,” eliminating redundancies as a result of acquisitions, and reorganizing some business units.
PPG continues to scout for coatings acquisitions, said Vince Morales, senior vice president and chief financial officer.
“The pipeline is active now,” he said.