DuluxGroup turns Japanese

If you can't beat 'em, buy 'em. Apparently that's the policy Nippon Paint Holdings has adopted, with the world's fifth-largest paint company announcing an agreed takeover bid for DuluxGroup at $9.80 a share.

Twelve years ago, Bunnings agreed to stock Nippon branded paints on its shelves alongside Dulux. But Nippon's Australian market entry failed, with Bunnings destocking the Japanese brand in 2010 after Wattyl - under new ownership - got its act together.

Most competitors have struggled against Dulux, which has become synonymous with paint in Australia. In turn, DuluxGroup has been a well-managed company, with the stock almost quadrupling since it was demerged from Orica in 2010.

The bid values DuluxGroup at $3.8bn, equivalent to a PER of 26 times 2018 underlying earnings. While DuluxGroup is a quality business, that's a steep multiple, especially given we expect a minor cyclical earnings downturn at some point. The $9.80 bid price could include fully franked dividends of up to $0.41 a share, so the value of the bid could be up to $9.98 a share including franking credits.

With the stock within cooee of our $6.00 Buy price in December, we'd hoped an opportunity might soon appear. But with the global paint market having consolidated significantly in recent years, we also worried that 'DuluxGroup might not be listed on the ASX forever'.

While another bid seems unlikely - it's at a significant premium to other takeovers in the sector - it's always possible. So as usual shareholders should sit tight.

The Scheme Booklet is expected to be mailed to shareholders in June, with the vote to take place in July and the bid to be wrapped up in August. Unlike Trade Me, we're likely to recommend shareholders vote for this scheme of arrangement but, for now, HOLD.