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Surprise — Others Think RPM Is Undervalued

Elliott Management ("EM") popping onto the RPM International (NYSE: RPM) landscape last month indicates to me investors will benefit from Elliott's organizational and financial acumen. Streamlining is underway to improve financial outcomes, or, there is a reason to believe, EM’s involvement might lead to a merger or acquisition of RPM.

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RPM share price took a fresh lively jump from the $49 range topping $61 in the days following a working agreement between the two companies, and the price has held strong in the subsequent weeks until the July 19 press release about Q4 ’18 and year-end earnings.

The Chain of Events

In February, RPM announced authorization for the repurchase of up to 10M shares. The company lurched along following torpid financial reports and analyses. Then on June 28 came an unforeseen, but bracingly forward, press release announcing:

  • The immediate seating of two new independent board members affiliated with EM.
  • The formation of a new Operating Involvement Committee “to Conduct Comprehensive Business Review Focused on Operational and Financial Value Creating Initiative.”
  • The consummation of an “associated cooperation agreement between RPM and affiliates of Elliott Management.”
  • RPM’s engagement outside management consultants AlixPartners LLP on the advice of EM to propose streamlining tactics, margin enhancing strategies and targets with a November 30, 2018 target date for implementation of recommendations.
  • By July 7, RPM’s president and the chief operating officer was out of office as part of the streamlining initiative; all group presidents immediately report to the Chairman and CEO, third generation stakeholder, Frank Sullivan.

The last item is an inexpressible part of this pantheon. Mr. Sullivan gave an interview at the end of April 2018 claiming he has not been “involved in the finer details of transactions and due diligence” in recent years. “I’m not nearly as hands-on as I used to be.” This sounds more like arrested development than a viable architecture for change.

I recommended RPM to Seeking Alpha investors in my last paint business article. I foresee share price bouncing into the $75 range or higher if EM’s strategies succeed or there is M&A activity. Multiple suitors might enter the fray to capture the stable of brand names that make RPM so attractive in the profluent but dull world of building supplies, paints, chemicals, and tech coatings.

A Value to Others

Name brands are gaining traction and value in the retail and wholesale paint business. Benjamin Moore paints (NYSE: BRK.A) sell largely on name brand value (I once owned BM’s largest independent chain of outlets). Home Depot (NYSE:HD) successfully built Behr paints (NYSE:MAS) into a retail national name brand. HD complements Behr with brand name Glidden (NYSE:PPG) for commercial painters. Sherwin-Williams (NYSE:SHW) has a multi-pronged program underway to bolster its retail image marketing the name brands it owns. SHW brought some glitz and glamour to the paint business attaching celebrity recognition with Ralph Lauren and Martha Stewart paints.

>Image source.

EM is considered by many to be the most successful and feared activist investment firm, with $39B in play today. EM’s assiduous co-CEO Singer enjoys a winning reputation for boosting returns “by restructuring businesses, shaking up management, or even putting (the businesses) up for sale,” writes Marty Lipton in Fortune. If anyone can get RPM back on track, it’s EM. But consider another option.

Akzo Nobel is an Option

EM holds a stake in Dutch company Akzo Nobel N. V. ADR (OTCQX: OTCQX:AKZOY), a worldwide leader in the paint, chemical and technical coatings sales. When AKZOY rejected a buyout offer from PPG, Mr. Singer launched a fire-hose torrent of actions, public, legal and insider moves against AKZOY management. AKZOY later sold off its chemical unit ($12.5B) and its Chairman eventually resigned. AKZOY holds ~$1.4B in cash, has Net Operating Cash Flow of $878.4M, Revenues nearing $14B, a strong Gross Profit Margin of 41.5%, and a Market Cap of almost $23B. AKZOY is looking to grow through acquisitions, is focusing on the core paints and technical coatings businesses, and seems to be at peace with EM. Perhaps EM is the tether bringing RPM and AKZOY together?

AKZOY’s recent operating income fell 23 percent and sales slid three percent per the second quarter report. Negative operating income was fast-tracked by adverse foreign currencies, the rise in raw material prices, and other non-recurring items. Together, RPM will give AKZOY more sales in the U. S. where the dollar is strengthening, the economy is booming and capital expenditures are increasing the value and demand for RPM products. AKZOY will bring management structure and lower overhead costs if it acquires RPM. It may open doors worldwide to RPM products in markets that have not been easy for RPM to penetrate.

RPM Financial Snapshot

Source.

Win-Win for Investors

The numbers from RPM Q4 ’18 and FY ’17 substantiate my suspicions that RPM will make a strong addition the Akzo Nobel: Y/Y Net Income increased 86% on Revenue of $5.32B or a benchmark factor of ~1.53 x Revenue to Market Cap making it a fair less dodgy buying opportunity at the current share price.

EM is counting on the name brands of RPM to pull it to increased valuation: "RPM has an outstanding collection of leading brands, and we believe the company has significant potential for further operating, financial, and balance sheet improvements." EM either streamlining operations and financial architecture or selling RPM will benefit shareholders. Management restructuring will not significantly add value to RPM. The value will have to come from increasing revenues worldwide, buying raw materials at lower prices through greater quantity purchases, and savings from better distribution. That is most likely to happen in tethering to a larger company. EM can make that happen for its benefit and other investors.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.


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Source : https://seekingalpha.com/article/4188383-rpm-international-moves-closer-sale-block

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