The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Jeffrey Goldfarb

NEW YORK, June 1 (Reuters Breakingviews) - "Ask Sherwin-Williams" is one of the U.S. paint maker's famous marketing slogans, used to spotlight the product advice available from its in-store experts. The most pressing question now, however, goes to boss Heidi Petz about her attempt to buy pieces of rival AkzoNobel AKZO.AS in a joint takeover bid with Nippon Paint. Why put her company's premium valuation in jeopardy?

Four companies are vying to remix the paint industry. AkzoNobel unveiled plans in November to unite with peer Axalta AXTA.N to create a more formidable $25 billion enterprise with chunky expenses to slash. Sherwin-Williams SHW.N and Nippon 4612.T want to bust up that combination, with the Japanese suitor proposing to acquire AkzoNobel's decorative paints and industrial coatings. The Dutch operator last week rejected their €73 a share offer, or about €12.5 billion, and plans to proceed with its agreed merger instead.

It might be a blessing in disguise for Sherwin-Williams. The $73 billion company trades at 25 times projected forward earnings, a far richer multiple than its rivals, according to Visible Alpha. PPG Industries commands less than 14 times and AkzoNobel almost 17 times, after getting a bump from the Axalta deal. A big reason for the discrepancy is some 5,400 Sherwin-Williams stores and branches, largely across the United States, which have become go-to spots for professional and DIY painters.

Combined with its smaller industrial arm, Sherwin-Williams generates an EBITDA margin of about 19% and has grown its top line at a compound annual rate of almost 8% over the past decade, to nearly $24 billion. By contrast, sales at the AkzoNobel automotive, marine and powder coatings units it is targeting slipped 4% last year, to €4.2 billion, from 2024. Assume they generate the same 14% margin as the company's broader coatings portfolio and that Sherwin-Williams pays a multiple of 14 times. In that case, it would be spending about €8 billion.

Sherwin-Williams successfully spruced up Valspar, which it acquired in 2017, and would find synergies in AkzoNobel. Even so, buying slower-growing and lower-margin businesses than its own risks changing investor perceptions. Combined with a $1.2 billion acquisition in Brazil last year, Petz is starting to create an impression that U.S. stores might lose some of their pricing power. They account for about 58% of revenue now, a proportion that would dip below 50% with Akzo's parts added. The danger is a diluted valuation, making the deal financial acetone.

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CONTEXT NEWS

Dutch paint producer AkzoNobel said on May 27 that it had rejected an all-cash joint takeover bid from rivals Sherwin-Williams and Nippon Paint and would proceed instead with its agreed deal to merge with Axalta Coating Systems.

Nippon, which would acquire AkzoNobel’s decorative paints and industrial coatings businesses, and Sherwin-Williams offered €73 a share, or about €12.5 billion. Sherwin-Williams would buy AkzoNobel’s divisions housing automotive and specialty coatings, marine and protective coatings, and powder coatings.

AkzoNobel and Axalta said on November 18 that they had agreed to an all-stock merger, with Axalta shareholders receiving 0.6539 shares of AkzoNobel for each Axalta share. AkzoNobel shareholders would own 55% of the combined company and Axalta investors would own the rest.