It is 13 days since Valspar, a US-based paint manufacturer, approached Wattyl with a takeover proposal pitched at $1.30 a share. While the Wattyl board is bunkered down in detailed valuation analysis and is yet to respond to the offer, nervousness in the paint industry regarding possible ramifications of a deal is building.
In particular, more than 120 independent owners of Paint Place stores, Wattyl's preferred trade and retail outlets, fear that their businesses will be damaged by a deal. If Valspar is buying Wattyl with an eye on supplying the Lowe's and Woolworths big-box hardware store venture, there is an expectation that the new hardware chain will seek exclusive access to Wattyl's best brands, such as Solagard.
This could leave Valspar running different brands in each channel, possibly promoting Solver Paints as the leading brand for Paint Place. But more significant to Wattyl shareholders is the question of how central the Wattyl product line-up is to the Lowe's and Woolworths strategy.
Talk suggests that while the Valspar offer looks a little undercooked, the Wattyl board should be wary of overplaying its hand. It may be feasible for Lowe's to range imported paint from Valspar, while a dark horse to watch in any paint industry shake-up is Haymes Paint of Ballarat.
Haymes, a fourth-generation family company, is the only significant independent paintmaker in the market. Haymes could either emerge as a supplier of exclusive product to Lowe's/Woolworths, or possibly be left to pick up the pieces though supplying the Paint Place group if its members feel disenfranchised following the acquisition of Wattyl.
PRICE TEST
A nation of home renovators will be watching Valspar's tilt at Wattyl with almost as much interest as Wattyl shareholders, hoping that a changing competitive dynamic in the Australian hardware market makes the Saturday trip to the hardware store a little less expensive.
Curiously, retail paint buyers in the US pay about half the price for paint than do buyers in Australia. But industry insiders believe it's going to take more than a change in control at Wattyl for retail prices to come down. The reason that Wattyl's profit margins have been skinny for years, despite high retail prices, is that Australian paint suppliers give too good a deal to trade buyers. A commercial painter will typically pay the same price for 10-15 litres as retail buyers pay for a four-litre can.
Meanwhile, chatter from the paint trade suggests that new Wattyl management, led by Tony Dragicevich, is more disciplined than the old guard in resisting the temptation to dress up the books at year-end. Last year Wattyl dumped stock into the trade channel at up to half price just before the June year-end in an effort to make its forecasts. This year limited quantities of discounted Solagard are available, but that is about it.
HIDDEN VALUE
Sometimes it takes a takeover offer to shine a light on an unloved and undervalued corner of the market.
That is how it seems at North Queensland Metals, where a $58 million cash-and-scrip offer from Conquest Mining announced on Thursday should prompt investors to pay attention to the profit outlook for the small narrow-vein goldmine operator.
Unhedged exposure to a rising gold price and tight cost management position NQM for bumper profitability. The company's 60 per cent owned Pajingo Mine, south of Charters Towers, produces 60,000 ounces of gold each year and has just completed projects to drive cash costs down to $700 an ounce. At the current gold price of about $1480 this translates to about $28 million annual cash flow to NQM, which also boasts $17 million cash and no debt. Factor in planned mine expansion over the next 15 months, increasing production to 100,000 ounces and the situation gets even brighter.
With those metrics, it is little surprise that NQM's smaller shareholders are rallying against the Conquest bid, labelling it opportunistic. They believe that Conquest is looking to take advantage of NQM's depressed share price at a time when management has been more focused on operations than external promotion.
The bid comes just as NQM is set to start posting strong quarterly cash-flow reports.
The NQM board is yet to respond to the offer. However, company presentations have highlighted the market's valuation of Pajingo as being out of step with comparable mines. NQM identifies two comparable narrow-vein mines held by Australian-listed companies - Mount Monger and Norseman. Like Pajingo, these two have plans to increase annual production to 100,000 ounces. However, while Pajingo is valued at less than $1000 for each ounce of annual production, the other two are valued at between $2000 and $3000.
With these valuation metrics at their fingertips, it is hard to see a majority of the NQM board welcoming the bid. However, possibly creating some tension around the table will be an NQM director, Donald Walker, who has entered into a pre-bid acceptance agreement with Conquest in relation to a 19.9 per cent shareholding in NQM.
dsymons@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
What is Valspar’s takeover proposal for Wattyl and how has Wattyl’s board responded?
Valspar, a US-based paint manufacturer, approached Wattyl with a takeover proposal pitched at $1.30 a share about 13 days ago. The Wattyl board is conducting detailed valuation analysis and has not yet formally responded to the offer.
How could a Valspar takeover of Wattyl affect Paint Place stores and the retail paint market?
More than 120 independent Paint Place owners fear a takeover could damage their businesses. If Valspar bought Wattyl with an eye to supplying the Lowe’s and Woolworths big‑box venture, it might seek exclusive access to Wattyl’s best brands (for example Solagard), run different brands across retail and trade channels, and potentially favour big‑box customers over Paint Place members.
Will a change of control at Wattyl make retail paint cheaper in Australia?
Not necessarily. While US retail paint buyers pay about half the price Australians pay, industry insiders quoted in the article say a takeover alone is unlikely to drive retail prices down. A key reason is that Australian paint suppliers already give very strong discounts to trade buyers—commercial painters often pay the same for 10–15 litres that retail buyers pay for a 4‑litre can—so margin and channel dynamics would need to change as well.
Who is Haymes Paint and why is it a 'dark horse' in the Wattyl takeover scenario?
Haymes Paint is a fourth‑generation family company and the only significant independent paintmaker mentioned. It could emerge as a supplier of exclusive product to the Lowe’s/Woolworths chain or could pick up business from Paint Place stores if members feel disenfranchised after a Wattyl acquisition.
What should everyday investors watch for while Wattyl’s board evaluates the Valspar offer?
Investors should watch the Wattyl board’s formal response, any signals about whether Wattyl’s product line is central to the Lowe’s/Woolworths strategy, potential channel exclusivity for brands like Solagard, and whether the board risks overplaying its hand given talk the Valspar offer looks undercooked.
Has Wattyl had any past sales practices that investors should know about?
Yes. The article notes that last year Wattyl dumped stock into the trade channel at up to half price just before the June year‑end to help meet forecasts. Current management under Tony Dragicevich is described as more disciplined and is resisting the temptation to ‘dress up’ results; only limited discounted Solagard stock is available this year.
What is Conquest Mining’s offer to North Queensland Metals (NQM) and why are some NQM shareholders upset?
Conquest Mining announced a $58 million cash‑and‑scrip offer for NQM. Small NQM shareholders are rallying against the bid, calling it opportunistic because NQM is showing improving operational metrics and is about to start posting strong quarterly cash flow. The NQM board has not yet responded to the offer.
How does Pajingo mine’s production and valuation affect NQM’s attractiveness to bidders?
Pajingo (60% owned by NQM) produces about 60,000 ounces of gold a year and has reduced cash costs to about $700 an ounce. At a gold price near $1,480 an ounce this generates roughly $28 million annual cash flow to NQM; the company also has about $17 million cash and no debt and plans to expand production to 100,000 ounces. Despite this, Pajingo is valued at less than $1,000 per ounce of annual production, while comparable narrow‑vein mines are valued at $2,000–$3,000 per ounce—an argument used by those who think NQM’s shares may be undervalued and why some shareholders view the Conquest bid skeptically. Note that one NQM director, Donald Walker, has a pre‑bid acceptance agreement with Conquest relating to a 19.9% shareholding, which could create boardroom tension.
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