St. Anthony: Hints of a federal deal in Graco acquisition

Despite concerns about reducing competition, federal regulators may be ready to allow the merger of two leading makers of industrial paint sprayers and finishing equipment.

Graco Inc. is in quiet discussions with the staff of the Federal Trade Commission that could pave the way to consummation of its government-contested $650 million acquisition of the industrial-finishings business of Illinois Tool Works (ITW).

The FTC staff, without announcement, last week suspended its antitrust case before an administrative law judge in Washington, D.C. That allows the agency to negotiate settlement terms with the Minneapolis-based manufacturer of paint sprayers and other fluid-handling equipment.

Meanwhile, Graco indicated in recent filings with the U.S. Securities and Exchange Commission (SEC) that it hopes to satisfy the government's competition concerns and avoid administrative hearings as well as a companion action in U.S. District Court in Minneapolis that is scheduled for trial in July. If the deal falls through because Graco can't convince the government it won't hurt competition, the company will have to pay a $20 million termination fee to ITW, according to a SEC filing.

Jim Graner, chief financial officer of Graco, confirmed the talks, but didn't give details.

"We are hoping this would allow Graco to proceed with the ITW finishings acquisition through a resolution without going to court, and possibly involving a limited number of product divestitures," said Graner.

Mitch Katz, a spokesman for the FTC in Washington, would only confirm that administrative case has been put on ice temporarily.

Antitrust lawyers say this could indicate that FTC staff members believe a settlement is possible. The suspension of the case would give the staff time to present a deal to the federal agency's commissioners for possible approval.

The FTC is concerned that Graco and ITW are the nation's two leading manufacturers of electric-circulating paint pumps for factories.

Graco has said the FTC too narrowly defined the market, and that other types of pumps do the same work, such as hydraulic and air-powered alternatives used in automotive factories and body shops.

Divesting units may help

Graco has indicated in federal filings that it may have to divest one or more ITW businesses in the deal.

"At the end of the day the government is trying to figure out if this will give the merged parties a monopoly ... or something like that," said Michael Lindsay, chair of the antitrust practice at Dorsey & Whitney, a Minneapolis law firm that is not involved in the Graco case. "Sometimes there is only a part of the transaction that the FTC thinks is anti-competitive ... and if you can sell off one part of the business, or 'a product,' there can be a compromise that saves the acquisition."

The company is based in northeast Minneapolis on the Mississippi River, and employs 2,300 people worldwide, including 1,800 in the United States. It makes 90 percent of its product domestically and exports more than half of that. It is considered an excellent employer and corporate citizen, and is run by CEO Pat McHale, who started on the shop floor as a machinist.

Moreover, it has been one of best stocks to own for the past five years. Graco, worth more than $3 billion in market value, closed Friday at $52.43 per share, near its five-year high stock price.

ITW is an industrial conglomerate valued at about $20 billion, with hundreds of business units and 60,000 employees worldwide making an array of industrial products, including fluids, polymers, putties, patch and repair products.

Anti-competitive fears

The FTC said last fall that the combined companies would dominate North American sales of industrial liquid finishing equipment, such as pumps and spray guns, and monopolize the market for circulation pumps used in paint systems in the automotive industry.

It would end competition between two major suppliers, reduce or eliminate price breaks that both firms now offer to distributors, and lessen Graco's incentives to develop new products, the agency said. Moreover, the FTC said that "significant hurdles and barriers would also deter new competitors from entering the markets."

However, if ITW divests certain lines to smaller competitors, that might make the deal more palatable.

McHale said recently in a Star Tribune interview: "This is a highly competitive industry, and the majority of our largest competitors are foreign companies. I am extremely disappointed with the position taken by our government.... We repatriate our foreign earnings and pay more than 30 percent in federal taxes. We offer great jobs in the heart of the city. In my view we are the good guys and worthy of the full support of our government."

McHale also called the offices of Minnesota's U.S. senators, Amy Klobuchar and Al Franken. He said Friday that he was told that "once the FTC initiates an enforcement action, the politicians can't do anything to help."

Neal St. Anthony • 612-673-7144 • nstanthony@startribune.com

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