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Disputed Graco-ITW Deal Moves Forward

Wednesday, March 28, 2012

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Reversing course, the Federal Trade Commission has green-lighted Graco’s controversial takeover of ITW Finishing LLC—with one big regulatory but.

The FTC announced late Tuesday that it would allow Graco to close the $650 million deal, and Graco set closing for April 2.

 Graco

 Graco

Graco will own the ITW businesses, but the Binks, DeVilbiss, Ransburg and BGK Curing Technology brands will be operated independently while the federal antitrust review continues.

However, the takeover would allow Graco only to take immediate, full control of Gema, ITW’s powder finishing business.

For now, the lion’s share of the business—leading brands Binks, DeVilbiss, Ransburg and BGK Curing Technology, which all serve the liquid finishing industry—will be kept from Graco’s direct control.

‘Walled Off’

The FTC ordered that the liquid finishing businesses be “held separate” and “run independently of—and in competition with—Graco until the FTC determines the divestitures necessary to prevent competitive harm from the acquisition.”

That means that the liquid finishing businesses will be officially owned by Graco but “walled off” from the rest of the company and its control until FTC makes a final determination on that piece of the deal, an FTC spokesman said Wednesday.

Until then, the businesses will be run by an independent trustee proposed by Graco and approved by the FTC.

Still, the full deal may be implemented sooner rather than later. The Commission said it had unanimously agreed to allow the deal to go forward, with the Order to Hold Separate and Maintain Assets, “because both the Commission staff and Graco appear to be moving toward a solution that will benefit consumers.”

The FTC also disclosed that it had moved March 13 to withdraw the matter from administrative adjudication to consider a settlement in the case proposed by Graco.

‘A Bad Deal’

Graco, which leads the $2 billion global spray equipment market, announced in April 2011 that it planned to purchase No. 2 ITW from Illinois Tool Works Inc. ITW’s finishing businesses reported $375 million in sales in 2011, according to Graco.

On Dec. 15, however, the FTC filed a challenge to the $650 million deal on antitrust grounds, saying that the spray giant’s takeover of its chief rival would create a monopoly that would hurt the North American finishing and manufacturing markets. The United States is the world’s largest market for paint spray equipment.

FTC’s surprise announcement included both an administrative complaint  and a threat to back it with a federal-court restraining order and injunction.

“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 agency said of the liquid-finishing brands.

Graco’s market domination would scare off potential new entrants, and other competitors are unlikely to grow to fill the competition gap, the FTC said.

‘Power Over its Distributors’

The FTC particularly noted potential harm to spray equipment distributors, who it said would “have no recourse to curb the loss of this competition.”

The agency’s complaint said in part: “Graco’s president acknowledges that Graco already enjoys power over its distributors and industrial end users: ‘Number one is that you’ve got lots of end users out there. Oh, by the way, those end users like Graco. And oh, by the way, if they already have Graco and they know Graco, the switching costs are significant for them to switch away from Graco.

“‘So . . . not only do you have thousands of end users, you have hundreds of distributors. And for a manufacturer, that’s a nice spot to be. . . . The ideal place to be, the sweet spot, for having the buyer power be low is to have lots of customers and lots of distributors.’”

Review Continues

For now, the FTC will continue to review Graco’s proposal to integrate the liquid-finishing business.

“During this hold separate period, FTC staff will more fully analyze the appropriate scope of divestiture and other relief needed to remedy the anticompetitive effects of the acquisition, as alleged in the FTC's complaint, and make its recommendation to the Commission,” Graco said in a statement.

In the end, the FTC is expected to “identify the products, businesses and/or assets that Graco will be required to divest,” the company said.

“We are looking forward to moving this transaction on to the next phase, although the final structure remains under consideration and will be impacted by requirements imposed by the FTC,” said Patrick J. McHale, Graco’s President and CEO.

“During this period, we ask the Liquid Finishing employees and their distributors worldwide to continue to do what you do best: Serve your customers, stay focused on the operations, and continue to drive innovation.”

Suit Pending

Graco is still facing an antitrust lawsuit from another competitor, Polyurethane Machinery Corp., of Lakewood, NJ.

The manufacturer of urethane spray and pour equipment has been pressing antitrust claims against Graco since 2008 in U.S. District Court in New Jersey.

PMC alleges that after Graco acquired Gusmer Corp. and GlasCraft Inc., it “systematically raised the prices of spray foam equipment, while simultaneously attempting to inhibit PMC’s entry into the market by threatening distributors with retaliation if they choose to do business with PMC.”

   

Tagged categories: Acquisitions; Binks; DeVilbiss; Graco; ITW Industrial Finishing; Mergers; Powder coatings; Spray equipment

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