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Linde says Praxair merger off table, starts restructuring

October 28, 2016
Chemical Value Chain

German industrial gases group Linde said reviving merger talks with Praxair was not on the cards and announced a further restructuring program instead on Friday, anticipating years of low growth.

“Praxair is not a live issue for us,” outgoing Chief Executive Wolfgang Buechele told Reuters in an interview. “Now it’s a different game.”

The reorganization, which Linde announced alongside forecast-beating quarterly results, is designed to save an extra 370 million euros ($400 million) a year from 2019, on top of an existing scheme to save 180 million euros a year.

Linde said it may withdraw from some markets, would optimize use of capacity at its smaller engineering arm and could divest non-core activities such as UK-based logistics unit Gist, while cutting what are likely to be thousands of jobs.

Buechele said Linde needed to resign itself to low growth and at the same time catch up with rivals in terms of profitability. “Our shareholders have very clear expectations,” he said.

Shares in Linde jumped to the top of the German blue-chip index .GDAXI on the restructuring news but retreated from a day’s high of 153 euros after Buechele’s remarks on Praxair, trading 1.7 percent higher at 148.95 euros by 0841 ET.

Buechele said he had done his utmost to get the merger done but it had not been possible to ensure the continuing status of Linde’s Munich headquarters. Now it was time for Linde to help itself, he said.

“The deal didn’t work out and so I resolved to get things under way,” he told a news conference.

Both Buechele and finance chief Georg Denoke announced their departure after the Praxair deal fell through last month. Denoke left immediately and Buechele will stay until the end of April.

Linde’s quarterly sales were flat, constrained by price pressure at its U.S. healthcare business as well as weak demand for plant engineering, but still beat forecasts, as did a 3 percent rise in adjusted operating profit.

Like peers such as Praxair, Air Liquide (AIRP.PA) and Air Products (APD.N), Linde is struggling with slower economic growth that has weakened demand in the manufacturing, metals and energy sectors, putting pressure on smaller players and leading to consolidation in the sector.

EXPECTATIONS

Linde’s core operating profit margin was flat at 23 percent in the third quarter. Praxair on Thursday reported a comparable margin of 33 percent and Air Products a margin of 35 percent.[]

Air Liquide had a first-half margin of just 17 percent due to its far less profitable engineering business and the integration of lower-margin Airgas.

Linde also plans to reduce its capital expenditure to 11-12 percent of sales in the medium term, from a previous average of 13 percent, while continuing to raise its dividend.

“Today’s reporting underpins our very positive (and contrarian) view on the stock,” Baader Bank analyst Markus Mayer, who rates Linde a “buy”, said in a note.

“Numbers are above expectation, cash flow was again strong and will remain strong due to the massive capex cut. The dividend is indicated significantly above consensus expectations and the significant restructuring plan will cut Linde’s fat.”

Linde’s restructuring costs will total 400 million euros over 2016 and 2017, meaning it is likely to cut between 3,000 and 4,000 jobs from its global workforce of 65,000, according to Reuters calculations.

It reiterated its full-year forecast, which foresees both sales and adjusted operating profit falling as much as 3 percent or rising as much as 4 percent, adjusted for currency fluctuations.

($1 = 0.9172 euros)

By Georgina Prodhan and Jens Hack

Source: Reuters

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