By Toby Sterling and Ludwig Burger
AMSTERDAM/FRANKFURT (Reuters) - Dutch paints maker Akzo Nobel, seeking to recover after rejecting a takeover offer and issuing two profit warnings, is discussing a merger with smaller U.S. rival Axalta Coating Systems Ltd to create a $30 billion company.
Akzo, the maker of Dulux paint, said on Monday it was in "constructive talks" about a "merger of equals" in what would be the first major deal by Chief Executive Thierry Vanlancker, who took over in July after Akzo spurned a 26 billion euro ($30.2 billion) offer from U.S. rival PPG Industries.
Reuters reported on Friday that Akzo had approached Axalta about a possible merger, sending Axalta's shares 17 percent higher. Warren Buffett's Berkshire Hathaway is the largest Axalta investor with a stake of just under 10 percent.
"This seems a classic attack-is-the-best-defense strategy," said a fund manager at one of Akzo's top-10 investors who asked not to be named.
"Akzo overpromised after defending their own company and started to fail to deliver in Q3, so (they) need to do something transformational," he added.
At 19.5 billion euros ($22.7 billion), Akzo's market value is close to three times that of Axalta at $8.1 billion at Friday's closing price of $33.15.
Even after the planned sale of its chemicals divisions, valued at 8-10 billion euros, the Dutch group would tower over its prospective partner, suggesting a lead role that typically results in a premium being offered to the junior partner.
Akzo said plans to divest the chemicals unit remained on track and a "vast majority" of net proceeds from the deal would be returned to shareholders.
Axalta's coatings for new vehicles could fill a gap in Akzo's portfolio, which caters to various other industries including manufacturing, marine and construction, analysts have said.
STIRRING THE POT
The relatively fragmented global paints and coatings industry has seen a frenzy of deal activity, as buyers seek scale to squeeze their raw materials bill to further bolster already attractive margins.
PPG's aborted move for Akzo followed BASF deals last year, selling its industrial coatings business to Akzo and buying Albemarle's surface-treatment unit Chemetall for $3.2 billion to focus on automotive coatings.
Before that, Sherwin-Williams snatched up rival U.S. paint company Valspar in an all-cash deal valued at about $9.3 billion.
The mooted combination would make Akzo the second-largest coatings player with a 12 percent market share, ahead of PPG but trailing an enlarged Sherwin Williams, analysts at brokerage Raymond James said.
Vanlancker has been forced to cut targets made in the heat of the takeover battle twice in the space of six weeks, blaming disruption caused by hurricane Harvey, rising raw materials costs and "headwinds" at its marine coatings business.
Akzo shares were 0.5 percent higher at 77.89 euros at 1120 GMT, well below a figure of around 96 euros proposed by PPG.
PRESSURE TO DELIVER
Analyst Joost van Beek of Theodoor Gilissen said that in negotiations over financial terms, Axalta would seek to take advantage of Akzo being under pressure to bulk up.
Analysts at Bernstein, in turn, stressed the strategic rationale, saying in a note the Akzo-Axalta merger "would improve scale and density in segments and countries where needed while taking out costs, most likely in the fragmented general industrial segment and in Europe".
They forecast savings of around 250 million euros from combining operations.
Akzo would not comment on how the deal could be structured, though describing it as a merger suggests it would pay mostly with shares.
Sources familiar with the matter told Reuters on Friday that talks were at an early stage and there was no guarantee the companies would come to an agreement.
Akzo has gone through tumultuous times of late.
After PPG's approach was fended off, a group of shareholders launched a court case seeking a vote to have Chairman Antony Burgmans removed, but lost.
Akzo's CEO and CFO then resigned, citing health reasons, while Burgmans is due to retire next year.
PPG has indicated it is no longer interested in trying to buy Akzo. After walking away from the deal on June 1, it is barred from rebidding for Akzo until Dec. 1.
Private equity firm Carlyle Group LP, Axalta's former owner, had considered selling the company to Akzo in 2014 before taking it public. ($1 = 0.8600 euros)
(Additional reporting by Simon Jessop in London and Bart H. Meijer in Amsterdam; Editing by Louise Heavens and Keith Weir)