Federal regulators have moved fast and hard to block an attempt by spray equipment giant Graco to take over its top competitor, contending that the $650 million deal would hand Graco a monopoly in the North American finishing market.
In a surprise announcement Thursday (Dec. 15), the Federal Trade Commission said it had filed an administrative complaint and would follow with a federal-court action to halt Graco’s purchase of ITW Finishing LLC from rival Illinois Tool Works Inc.
|Graco’s mission, according to an investor presentation in November: “Move – Measure – Control - Dispense – Apply.”|
The deal would eliminate Graco’s chief competition in the liquid finishing sector. The FTC’s 12-page complaint, heavily redacted with blacked-out information, names Graco, ITW Finishing LLC and Illinois Tool Works.
ITW Finishing owns five of the industry’s oldest, best-known brands:
• Binks (spray finishing equipment);
• DeVilbiss (the leading supplier of spray finishing equipment to the industrial and automotive refinish markets);
• Gema (powder finishing equipment);
• Ransburg (electrostatic equipment and accessories); and
• BGK Finishing Systems (curing technology).
‘A Bad Deal’
“Graco’s proposed acquisition of ITW, its largest and most significant competitor, threatens to harm competition for certain industrial liquid finishing equipment in North America and lead to higher prices for North American distributors and end users already struggling in today’s economic environment,” the FTC complaint says.
The acquisition also would suppress product innovation, drive off any potential entrants to the industry, and harm manufacturing nationwide, the complaint says.
|Russell Gray was a parking-lot attendant in 1926 when he founded Gray Company (Graco, as of 1969). Gray had developed a grease gun that could lubricate cars even in the Minnesota winter.|
“Liquid finishing equipment is critical to manufacturers,” said Richard Feinstein, Director of the FTC's Bureau of Competition. “Only three significant competitors sell and service it in North America, with Graco Inc. and ITW together dominating this field.”
(The “distant third” supplier, Feinstein noted, is Exel N.A., of Plymouth, MI, which owns Kremlin Rexson and Sames Technologies.)
“Combining competitors in these markets would be a bad deal for manufacturers and consumers, and would leave them facing higher prices and reduced innovation.”
The FTC argues that the Graco-ITW deal would specifically harm these product markets:
• Liquid finishing pumps for industrial uses;
• Liquid finishing spray guns;
• Proportioners, which mix and blend paint with catalysts and other liquids for industrial applications:
• Industrial liquid finishing equipment for resale; and
• Circulation pumps for paint systems in automotive assembly plants.
The FTC said the combined firm “would control a dominant share of all North American sales of industrial liquid finishing equipment and have a monopoly specifically in the market for circulation pumps used in paint systems in the automobile industry.”
The FTC issues a complaint when it has reason to believe that trade laws have been violated. The complaint is not a finding or a ruling.
The commission said it also had voted unanimously to seek a temporary restraining order and preliminary injunction to stop the deal.
The acquisition plan, released in April, followed a widely publicized brand realignment by ITW Finishing in March, when the company rolled Binks, DeVilbiss, Ransburg and BGK into a new business unit called ITW Finishing Equipment Americas.
The United States is the world’s largest market for paint spray equipment.
In a November presentation to investors, Graco identified ITW as one of six Industrial segment competitors (the others were Exel, Idex, IR/Ingersoll Rand, Dover and Wagner) controlling a $2 billion global market that grew 27 percent in the third quarter of 2011, compared to the same quarter of 2010. ITW’s finishing businesses reported $305 million in revenues in 2010.
By contrast, Graco’s five lubrication competitors controlled a $1.1 billion market, and Wagner was deemed the sole competitor in the $0.5 billion contractor market.
The presentation showed acquisitions playing a significant part of Graco’s growth plan, leading it to a 12+% Compound Annual Growth Rate.
The Industrial segment makes up 55% of Graco’s revenues, with segment sales in the first nine months of 2011 totaling $377 million. The third quarter of 2011 saw a 20 percent increase in sales over Q3 of 2010, with a gross profit margin of 56 percent.
Graco’s 2010 sales totaled $744 million, with 55% in the Industrial segment and 55% in the Americas.
Minneapolis-based Graco said it would counter the FTC’s litigation with its own and called the acquisition beneficial for end users and distributors.
Graco president and CEO Patrick J. McHale said he was “disappointed” with the FTC’s decision and would see the agency in court.
|The company founded by the Toledo physician is now the leading supplier of spray finishing equipment to the industrial and automotive refinish markets.|
“Graco strongly believes this transaction is pro-competitive and intends to vigorously fight for approval in court," said McHale. "The liquid finishing industry is highly competitive with many serious, quality competitors in each product category.”
The deal would not change distributor practices, McHale said. Distributors would remain non-exclusive and keep the right to distribute products from other manufacturers.
McHale added: "This transaction will benefit both end users and our distributor partners as we continue to invest in new products, customer service and manufacturing efficiencies.
“It is unfortunate that the FTC has taken action which we believe, if successful, will hurt manufacturing and jobs in this country."
Centuries of Heritage
The influence of the brands in the ITW Finishing family would be difficult to overstate.
Innovation-focused DeVilbiss, founded in 1888 by a Toledo, OH physician, has pioneered many new spray technologies for more than a century. The company is now the leading supplier of spray finishing equipment to the industrial and automotive refinish markets. ITW bought DeVilbiss in 1990.
|Dr. Josef Wagner invented the “Whisker,” an electric spray gun for atomizing paints, in 1953, launching what it now the Wagner Group, still independent of Graco and ITW Finishing.|
Ransburg, founded in 1936, joined ITW under the same umbrella as DeVilbiss. The inventor of the electrostatic process, the company services all industrial applications. The electrostatic spray coating process patented by Harold Ransburg in 1941 has spawned a variety of products used in today's high-transfer-efficiency atomization processes.
Joseph Binks founded his company in the basement of Marshall Field & Co. in 1892, when he “figured out how to spray the walls instead of brushing them, and saved a lot of time,” the company notes.
“Soon, he used his invention to rescue the opening of the 1893 Columbian Exposition: Just days before the opening, nine of ten exhibit buildings stood unpainted, but Binks saved the day.”
Today, Binks’ extensive product line includes everything from all manner of spray guns to pressure tank liners, respirators and booth coating products. ITW acquired Binks in 1998.
Switzerland-based Gema has been a player in the global electrostatic powder coating market for more than 40 years, with products ranging from simple manual coating units to fully automated powder coating systems.
BGK, based in Minneapolis, designs and manufactures electric infrared curing systems for liquid and powder coatings, Teflon, UV coatings and adhesives in a wide variety of industrial settings.
A hearing on the FTC’s administrative complaint has been set for May 15, 2012.