Sep 30, 2021

Coatings & Adhesives – September 2021

Coatings & Adhesives Sector Poised for Growth and Robust M&A Activity

Publicly listed coatings and adhesives companies have reported earnings results for the quarter ending May or June 2021, revealing many insightful trends into the health of the sector. Common themes included:

  1. Demand has improved significantly from the same quarter in 2020 (which was adversely impacted by the early days of the pandemic).
  2. Supply chains across the U.S. remain far from normal and the recent Hurricane Ida will likely exacerbate disruptions.
  3. Raw material prices have increased quite sharply, and industry participants believe this trend will continue.
  4. Companies have passed most of these price increases on to customers, however there is always a lag between inflation in raw material prices and price hikes on final goods.
  5. Both domestic and international shipping costs have also increased.
  6. There is significant upward pressure on wages.
  7. Demand remains strong, but long-term customer retention is a challenge with the constraints listed above.
  8. Deal activity and valuations remain robust.

The second quarter of 2020 was an extremely difficult period across the industry.  Public companies saw significant sales declines from the corresponding period in 2019.  However, business has since rebounded quite strongly across the board.

The rebound was driven by the strong economic recovery over the last-twelve-months (LTM) with some factors being more relevant for the Coatings & Adhesives sector including:

  • Lockdowns and Work From Home (WFH) resulted in a lot of people taking on home improvement and DIY (do it yourself) projects.
  • Property and infrastructure managers took advantage of lower traffic and empty buildings to schedule maintenance and upgrade projects.

The recovery has been so pronounced that it is common to hear sector executives say they are on track for record topline performance.  However, recent events have caused industry professionals to temper their robust forecasts for the current fiscal year.

The chief area for concern appears to be the current state of the supply chain across the industry.  Fingers point to February’s Big Freeze in Texas that hampered production along the U.S. Gulf Coast as the initial trigger. The impacts were so severe that the CEO of a mid-size coatings company told Capstone that at one point, they were tracking “120 force majeures” across the industry.  Early in the summer, executives were confident that the issues would resolve themselves by Labor Day.  This has proven to be wildly optimistic, and most industry participants do not see a return to “normal” before the end of the year.

Given the number of force majeures and attendant allocations, it should come as no surprise that raw material prices have increased significantly.  Dow (NYSE:DOW), a major supplier to coatings and adhesives manufacturers, increased local sales prices by 53% over the year ago period and 16% over the first quarter, according to its Q2 earnings release.1  Granted, Dow sells a lot more than just Coatings & Adhesives inputs, but look at other suppliers to the sector and you will see a similar pattern.

The situation is starting to hurt.  In September, PPG Industries (NYSE:PPG), Sherwin-Williams (NYSE:SHW), and Axalta Coating Systems (NYSE:AXTA) published statements indicating they now believe that Q3 2021 sales will be lower than they had previously anticipated.  While Sherwin-Williams placed the blame squarely on raw material availability, PPG and Axalta also cited a reduction in customer production due to parts shortages (e.g. semiconductor chips) and continued logistics and transportation challenges in many regions.

Both issues cited by PPG and Axalta have received ample coverage.  Automakers, electronic goods manufacturers, and various others have pointed to shortages of semiconductor chips as a reason for recent production disruptions.  Spot container rates from Asia to the U.S. West Coast are 14x higher than rates in 2019 and 70x higher than they were two years ago, according to a September Wall Street Journal article.2

Labor related issues form the final piece of this particular puzzle.  The U.S. now has more open positions (10.9 million as of 7/31/2021) than at any other point in history, according to the Bureau of Labor Statistics.3  This, coupled with pandemic-related unemployment assistance that some believe has reduced the number of active jobseekers, has led to sharp increases in wages.  Conversations with industry executives reveal significant concerns about finding the right people for open roles and the increasing upward pressure on wages.

In spite of all these pressures, the Coatings & Adhesives sector is witnessing strong demand and industry leaders remain cautiously optimistic regarding the outlook.  As stated above, supply chain issues are the biggest concern for the sector and may continue to result in prolonged delays and inflated costs for some time.

Deal Activity in the Current Environment Has Rebounded From 2020 Lows

After a lull in Q2 and Q3 of 2020, deal activity has bounced back. Management teams are actively seeking to gain scale, fill capability gaps, enter new markets, move on rarely available assets, or all of the above.

Strategics continue to be very aggressive in pursuing deals.  Within Coatings, PPG has been the most active acquirer since the merger and acquisition (M&A) market reopened late last year, having announced and closed on Ennis-Flint (November 2020, $1.2 billion); Tikkurila Oyj, formerly HLSE:TIK1V, (December 2020, $1.9 billion or 17.6x EV/EBITDA); VersaFlex (January 2021, undisclosed) and Wörwag Coatings (January 2021, undisclosed), while Arkema’s (ENXTPA:AKE) Bostik subsidiary has played that role in Adhesives.

There have been some frankly eye-popping valuations brandished by strategics recently, including:

  • In August, Arkema/Bostik agreed to pay $1.65 billion for Ashland’s Performance Adhesives business which represents 20.1x LTM EBITDA.
  • Danish group, Hempel agreed to acquire U.K.-based Farrow & Ball for £500 million (~$707 million) or 5.5x EV/Revenue.  The EBITDA multiple is rumored to be around 20.0x.

Strategics have become increasingly adept at identifying and extracting synergies (especially serial acquirers like PPG) allowing them to be extremely aggressive in competitive situations.

Private equity groups and their coatings and adhesives platform companies have also been very active in the space. Companies backed by Arsenal Capital, Audax, and SK Capital have all announced acquisitions this year.

While we expect deal activity to remain robust, there are some potential issues that could adversely affect sector M&A going forward.  Continued supply chain uncertainty and cost increases could impact performance, thereby persuading sellers to wait until things stabilize.  A case in point—we recently heard of one sale process (in the broader Chemicals space) that was halted as rising raw material prices made achieving forecasts presented in marketing materials more challenging.

Another topic that has become increasingly relevant is the marked change in antitrust enforcement in recent months. We have had several discussions with leading antitrust lawyers recently and the message has been consistent—both the Department of Justice and Federal Trade Commission will be scrutinizing deals very closely going forward. The changes are so recent that only time will tell as to how much of an impact they have on deal making.

Bottom line, while there are certain near-term challenges, we believe the sector is poised to enjoy further growth and a robust deal environment.


  1. Dow, Inc. “Dow Reports Second Quarter 2021 Results,”, accessed September 23, 2021.
  2. The Wall Street Journal, “Rising Shipping Costs Are Companies’ Latest Inflation Riddle,”, accessed September 23, 2021.
  3. Bureau of Labor Statistics, “Job Openings and Labor Turnover—July 2021,”, accessed September 23, 2021.

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