Sherwin-Williams' Offer for Valspar Looks Fair

 Sherwin-Williams (SHW) will acquire  Valspar (VAL) for $113 per share under an agreement approved by both companies' boards of directors. While the strategic rationale for the deal is to diversify cash flows geographically and by product segment, we think the gain to shareholders comes from the synergies generated by the combined company. The offer represents a 34% premium to Valspar's share price before the announcement ($84 on March 18), but we think Sherwin-Williams will be paying a reasonable price as much of the targeted cost synergies should be realized. While some divestments may be required, we expect the deal to go through. We maintain our fair value estimate of $270 for Sherwin-Williams, as we believe the deal is value neutral for shareholders. We have increased our fair value estimate for Valspar to the deal price of $113 (versus $86 stand-alone). The combined company is likely to garner a narrow Morningstar economic moat rating, reflecting the narrow moats of the individual firms.

While Sherwin-Williams has primarily been a U.S.-focused paint supplier, this transaction will add diversification in Asia Pacific and Europe, the Middle East and Africa, increasing its overall international exposure to 24% from 16% of sales. It also adds exposure to packaging and coil coatings, where Valspar has a strong global position.