New Sherwin Williams HQ plans may stir by 2020

Sherwin Williams' world HQ is the 89-year-old Landmark Office
Building in downtown Cleveland that the Fortune 500 company
outgrew five years ago. That was before it swallowed up rival
Valspar Corp. (KJP). (CLICK IMAGES TO ENLARGE)

By the end of this year, Cleveland coatings giant Sherwin Williams (SHW) plans to issue a request for proposals (RFP) from design-build teams for a new or expanded corporate world headquarters and research facilities. That's the word from two sources in the development community.

Once SHW wrapped up legal and staffing issues in the summer of 2018 surrounding its acquisition of rival Valspar Corp., it commissioned work on drafting an RFP for the combined company's facilities. While most of the parameters in the RFP aren't known, some are. For example, the RFP will reportedly seek proposals not only for a new headquarters but also for a new research center.

It is apparent that SHW will re-open consideration of Downtown Cleveland sites for the new headquarters or an expansion of its existing headquarters. Prior to launching its plan to acquire Valspar in 2016, the company was near to announcing a new headquarters tower on the Jacobs Group-owned parking lot on Public Square, according to a source at a firm hired by SHW five years ago to assist its extensive due diligence efforts.

SHW's headquarters since 1930 has been the Landmark Office Tower, 101 Prospect Ave. which it has owned since 1985 but outgrew five years ago. The growth accelerated even more rapidly following the Valspar deal, with local SHW employment increasing by 615 people between June 2017 and June 2018, to nearly 5,000 employees. SHW corporate office and research activities now are scattered among six facilities in Greater Cleveland.

Reportedly, SHW's charter directs its principal offices to be located within one mile of where the company was founded in 1866, roughly where SHW's Breen Technology Center is today at 601 Canal Rd. If the existing headquarters is vacated, the RFP may include parameters for purchasing and redeveloping it.

SHW's Breen Technology Center is next to where the company
was founded on Canal Road in 1866. The crowded R&D facility
is in need of a larger, more modern replacement. While it could
be built anywhere in the world, it will likely be close enough to
the downtown Cleveland headquarters to retain easy, personal
interaction between SHW's executives and scientists (Google).

Unlike the headquarters, there is no corporate restriction on where the Breen Center should be located. A new research and development facility is also part of the RFP, a source said. More than 400 people work at Breen which was built in 1948 and expanded in 1998. Today, the facility is so full that most of Valspar's R&D staff has had to remain in Minneapolis.

The RFP will likely leave it open to relocate SHW's primary R&D facility to anywhere in the world, although remaining relatively near the headquarters is apparently desirable. There is a lot of personal interaction between the two facilities, as SHW executives and researchers regularly walk back and forth between Landmark and Breen in their duties to advance new products and processes.

The timing of the release of the RFP before 2020 coincides with SHW's progress in paying down debt it incurred from the Valspar acquisition. SHW has been hyper-focused on paying down that debt and will not consider a new headquarters or research facility until its debt load is reduced. That includes leasing new facilities built and owned by others because long-term leases also count as debt.

In 2017, SHW's debt was more than four times higher than the average debt-to-equity ratio of its competitors in the coatings industry.

SHW's debt load is still significant but improving. Right after the Valspar acquisition was given the green light by numerous governments around the world, more than $11 billion of debt was on SHW's books in the third quarter of 2017. Its debt is now dropping to near $9 billion, but was just below $2 billion before acquiring Valspar.

So far, SHW has been able to pay off about $1 billion of its debt per year thanks to strong cash flow from increased business following the Valspar buy. The firm is not over-leveraged, however, as measured by the debt-to-equity (D/E) ratio. SHW's D/E ratio was 4:1 in 2017 but is now below 2.5:1 and should be at 2:1 by the end of this year.

An over-simplified projection of how and when SHW's debt-
to-equity ratio could recover from the Valspar acquisition and
return to an industry standard 1:1 ratio. SHW will not build or
pay a long-term lease for a new headquarters until its debt is
reduced to a normal level. Note that it takes more than three
years to design and build a skyscraper (KJP).

For context, competitor PPG's D/E ratio is at 1.66:1, although their debt is at a five-year high. The industry average is slightly better than 1:1. It is possible that SHW's D/E ratio could approach PPG's level by level by the middle of next year, assuming cash flow and share values do no worse than remain stable.

Assuming there are no major corporate or economic hiccups, SHW's D/E ratio should be able to reach 1:1 by the end of 2022. That's interesting timing considering that it takes more than three years to design and build a roughly 1-million-square-foot skyscraper that would be big enough to accommodate all of SHW's scattered corporate offices and allow room for future growth.

That three-year clock could start ticking at the end of this year. That coincides when sources say SHW will issue its RFP to developers for what would likely be the largest office building constructed in downtown Cleveland in 30 years.

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