Competition Bureau statement regarding the acquisition of Valspar by Sherwin-Williams

The Competition Bureau (Bureau) announced today that it has reached a consent agreement with The Sherwin‑Williams Company (Sherwin‑Williams) and The Valspar Corporation (Valspar) that resolves the Bureau’s concerns related to Sherwin‑Williams’ proposed acquisition of Valspar.Footnote 1

Sherwin‑Williams and Valspar are global companies engaged in the development, production, distribution, and sale of a wide range of architectural and industrial paint coatings to commercial, retail and industrial customers. In particular, the companies are close competitors for the supply of industrial wood coatings used by original equipment manufacturers (OEMs) of cabinets, furniture, and building products.

The Bureau determined that Sherwin‑Williams’ acquisition of Valspar would likely result in a substantial lessening of competition for customers that require a long‑term supply of large batch shipments of industrial wood coatings in and into Canada, resulting in higher prices. To remedy this concern, the consent agreement requires the sale of Valspar’s assets in Canada and the United States used exclusively or primarily in support of the supply of industrial wood coatings in Canada, including manufacturing plants, research and development (R&D) assets, intellectual property, and customer contracts. The Commissioner of Competition has approved Axalta Coating Systems Ltd. (Axalta) as an acceptable purchaser of the Valspar assets that must be sold.

Throughout its review the Bureau conferred with other jurisdictions, including the United States, Europe, China and Australia. As the assets being sold are located in Canada and the United States, the Bureau worked closely with the United States Federal Trade Commission (U.S. FTC) to ensure an effective remedy.

Background

On March 20, 2016, Sherwin‑Williams announced its proposed acquisition of all issued and outstanding common stock of Valspar in a transaction valued at approximately US$11.3 billion (Proposed Transaction).

The coatings industry can be segmented into two broad categories:

  1. architectural coatings, and
  2. industrial coatings.

Architectural (or decorative) coatings refer generally to products such as paints, primers, sealers, varnishes, stains and specialty products used on the interior and exterior surfaces of residential and commercial buildings. Industrial coatings include products generally applied in a manufacturing setting (e.g., automotive OEM coatings, heavy equipment coatings, industrial wood coatings, etc.), as well as non‑decorative coatings that are formulated for special applications and/or to withstand special environmental conditions such as extreme temperatures, immersion, or chemical resistance (e.g., automotive refinish coating, industrial maintenance and protective coatings, marine coatings, etc.). Sherwin‑Williams and Valspar overlap in Canada, to varying degrees, across a number of architectural and industrial coatings categories.

Analysis

In Canada, Sherwin‑Williams and Valspar together have a significant footprint with respect to the production and supply of industrial wood coatings. Each company has a manufacturing plant in Ontario (Sherwin‑Williams in Fort Erie and Valspar in Cornwall) from which it supplies the majority of its Canadian customers. However, each company also supplies some Canadian customers from manufacturing plants located in the U.S. The demand profile of Canadian industrial wood coating customers can be segmented into those OEMs that require customized, small batch (i.e., low volume) shipments and those that require a long‑term supply of large batch (i.e., high volume) shipments.

Market Definition

Small Batch Shipments

Cabinet, furniture, and building product OEMs that service customers placing low volume, highly customized orders of wood products require small batch deliveries of industrial wood coatings from companies such as Sherwin‑Williams and Valspar. When batch size is small, delivery costs are a significant component of pricing. For this reason, industrial wood coatings suppliers tend to focus their small batch deliveries on customers located relatively close to their manufacturing plants where they have a cost advantage and earn higher net profits. Because the cost disadvantage faced by distant suppliers is significant, the Bureau concluded that the relevant geographic market for the supply of customized small batch shipments of industrial wood coatings is likely no broader than Canada.

Large Batch Shipments

OEMs engaged in the mass production of cabinets, furniture, or building products source large batch shipments of industrial wood coatings to feed into high volume production runs. Because these OEMs place a premium on achieving product consistency, they rely on coatings suppliers who are able to guarantee product consistency from batch to batch and year over year. In addition, these OEMs require suppliers with sufficient scale to ensure certainty of supply (i.e., the ability to supply from multiple coatings plants to mitigate supply disruptions from any one location), and to service multiple ship‑to locations. As a result, these OEMs apply vigorous and lengthy qualification protocols for new coating suppliers, prefer long‑term supply contracts, and have high contract renewal rates. Because delivery costs are not as significant a component of pricing as batch size increases, the Bureau concluded that the relevant geographic market for the long‑term supply of large batch shipments is likely Canada and the U.S.

Competitive Effects

The Bureau found there to be effective remaining competition for customers in Canada sourcing small batch shipments of industrial wood coatings.

With respect to customers in Canada that require a long‑term supply of large batch shipments of industrial wood coatings, the Bureau found there to be insufficient remaining competition to prevent a post‑merger material price increase for a significant period of time. In addition, scale and reputational barriers are not insignificant, nor is it likely that small scale suppliers can expand in a timely manner when customers are engaged in long‑term contracts with incumbent suppliers. As a result, absent a remedy, the Bureau concluded the Proposed Transaction would likely substantially lessen competition for customers that require a long‑term supply of large batch shipments of industrial wood coatings in Canada.

Aside from industrial wood coatings, the Bureau found there to be effective remaining competitors for the supply of the other overlap architectural and industrial coating categories in Canada.

Remedy and conclusion

Divestiture

To remedy the Bureau’s concerns related to industrial wood coating, the consent agreement requires the sale of Valspar’s assets in Canada and the U.S. used exclusively or primarily in support of the supply of industrial wood coatings in Canada. The Bureau is satisfied that the consent agreement will preserve competition for customers that require a long‑term supply of large batch shipments of industrial wood coatings in Canada, as well as protect innovation in the market.

Axalta as Purchaser

The Commissioner has approved Axalta as an acceptable purchaser, and under the terms of the consent agreement, Sherwin‑Williams has 10 days following completion of the Proposed Transaction to complete the sale to Axalta. Prior to entering into the consent agreement, the Bureau determined that Axalta is committed to carrying on Valspar’s industrial wood coatings business and has the managerial, operational and financial capability to effectively compete in Canada, thereby, resolving the likely substantial lessening of competition that would otherwise occur. In the event Sherwin‑Williams fails to complete the divestiture to Axalta within 10 days of closing its acquisition of Valspar, the Commissioner of Competition shall appoint a divestiture trustee to complete the divestiture.

International Cooperation

Given that Sherwin‑Williams and Valspar each have industrial wood coatings assets located in Canada and the U.S., including manufacturing plants, R&D labs, and distribution centers, the Bureau coordinated with the U.S. FTC to ensure an effective remedy. The same monitor has been appointed by the Bureau and the U.S. FTC to oversee Sherwin‑Williams’ compliance with the consent agreement. The monitor will also oversee transitional input supply, tolling and services arrangements between Sherwin‑Williams and Axalta during an interim period to ensure the effective and efficient transition of the industrial wood coatings business to Axalta.

The Commissioner is satisfied that the terms of the Consent Agreement, including the divestiture of assets to Axalta, a new entrant in this market, address his concerns related to the Proposed Transaction.

The Competition Bureau, as an independent law enforcement agency, ensures that Canadian businesses and consumers prosper in a competitive and innovative marketplace.

This publication is not a legal document. The Bureau’s findings, as reflected in this Position Statement, are not findings of fact or law that have been tested before a tribunal or court. Further, the contents of this Position Statement do not indicate findings of unlawful conduct by any party.

However, in an effort to further enhance its communication and transparency with stakeholders, the Bureau may publicly communicate the results of certain investigations, inquiries and merger reviews by way of a Position Statement. In the case of a merger review, Position Statements briefly describe the Bureau's analysis of a particular proposed transaction and summarize its main findings. The Bureau also publishes Position Statements summarizing the results of certain investigations, inquiries and reviews conducted under the Competition Act. Readers should exercise caution in interpreting the Bureau’s assessment. Enforcement decisions are made on a case‑by‑case basis and the conclusions discussed in the Position Statement are specific to the present matter and are not binding on the Commissioner of Competition.


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