Alesco: a poor fit for DuluxGroup

James Greenhalgh is aware that garage doors are usually painted. But it’s not enough to convince him that Alesco is a suitable acquisition for DuluxGroup.

Another day, another single-focus company ‘di-worse-ifies’. DuluxGroup, spun out of Orica in mid-2010, has just announced it will bid $2.00 per share for Alesco.

Around 75% of DuluxGroup’s revenue comes from paint and coatings brands like Dulux and British Paints, with the remainder from Selleys and Yates. These are excellent brands with similar characteristics—low value, consumer-focused, renovation-driven.

I contend that Alesco, which makes garage doors and construction products, is not a suitable acquisition. Sure, management offers up the usual justifications, including earnings diversification, cross-selling and product extension opportunities, leveraging distribution networks and the rest. And the acquisition will be ‘EPS-accretive’. Of course.

But I suspect DuluxGroup, like so many other companies before it, has other, less shareholder-friendly motivations as well.

Quack, quack

Like many single-focus companies, DuluxGroup is itself a sitting duck for takeover. International chemicals giant AzkoNobel owns the Dulux paint brand everywhere except Australia and New Zealand. While AzkoNobel did not bid for DuluxGroup when Orica was looking to sell the business, it might be interested in future. So might private equity.

What better way to dissuade them than by buying inferior businesses? Even better, the debt taken on to finance Alesco makes DuluxGroup less attractive to acquirers.

I suspect some of the same motivations were at play in Graincorp’s expansion into the international malt business. Newcrest’s acquisition of the notoriously difficult Lihir gold mine in 2010 also made it a much larger, more takeover-proof company.

If you’re running a company, all the incentives are to launch takeovers. Investment bankers are continually whispering ‘buy something’ in your ear (when ‘sweet nothings’ would be preferable). Takeovers are also much more exciting than simply trying to run your existing businesses better.

Show me the money

They allow you to argue for a higher salary because you’re now running a larger and more complex company. And, if you turn around an underperforming operation, you look like a hero.

If it doesn’t work, you blame a cyclical downturn and depart with a million dollars in your back pocket.

DuluxGroup’s acquisition of Alesco isn’t the silliest takeover I’ve ever seen. Maybe DuluxGroup managing director Patrick Houlihan has what it takes to run the next building materials conglomerate (if you’d like to hear from him directly, Intelligent Investor members can listen to our November 2010 Boss Talk interview).

Ultimately, though, it’s not up to company management to diversify. Shareholders can diversify very well themselves, thank you.

For a company, the best defence against takeover is strong performance and shareholder friendly behaviour. I contend management teams are more likely to deliver that when they live and breathe their existing businesses. Distractions increase the likelihood of mistakes.

Unfortunately for DuluxGroup shareholders, it’s already too late. They can hope for a counter-bid for Alesco, but management has now made its intentions clear. More di-worse-ifications are coming.

What’s your view on the DuluxGroup takeover of Alesco? Am I being too harsh?

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