Praxair Inc. is in discussions to combine with Germany’s Linde AG, according to a report in the Wall Street Journal citing people familiar with the matter.
The combination would create the world’s largest industrial gases company with combined revenues of roughly $30 billion before possible divestitures. Praxair could not immediately be reached for comment. Linde on Tuesday declined to comment.
Praxair, with a market capitalization of $33.7 billion, posted 2015 revenues of $10.7 billion and EBITDA of $3.6 billion and has 27,000 employees. Linde, with a market cap of $28.9 billion, had 2015 revenues of €18.9 billion ($20.0 billion) and EBITDA of €4.1 billion ($4.6 billion) with 65,000 employees.
The reports follow Air Liquide SA’s successful completion of its $13-billion acquisition of Airgas Inc. in May, which pushed it ahead of Linde for the leading global position in industrial gases. The combined company had 2015 revenues of roughly $22 billion.
“While we peg such a transaction as remote, a 20% probability, it is not implausible,” says Laurence Alexander, analyst with Jefferies LLC (New York). “Even allowing for disposals, the combination would likely emerge as the market leader in North America, Praxair’s stronghold, while also enjoying an enhanced presence in Central Europe that would complement Praxair’s solid position in South America.”
Other analysts are also sceptical that a deal between the two industrial gases majors could be realized. Jeremy Redenius, analyst with Bernstein, says he can see the appeal in a Praxair-Linde combination. “The industry faces significant headwinds as too much capacity continues to pressure returns for them and their customers.” However, antitrust regulators, especially in the US, Europe and China, will likely challenge the combination’s onsite market positions. “The global industrial gas industry is concentrated with the top four producers having over 75% share. Praxair-Linde would have about 40% of global market share….There are significant overlaps across the businesses, especially in their ability to offer onsite projects–taking the numbers of providers from four to three. Overlaps in their merchant businesses could be remedied through many small divestitures,” Redenius says, adding that Praxair has publicly stated that it is not interested in Linde’s US homecare gas business, Lincare, which is not about 20% of Linde’s sales. Also, the large valuation gap makes a merger unlikely and Praxair’s track record of prudent investment makes an outright takeover even less likely, Redenius says.
Linde’s shares have underperformed Praxair’s by 20% over the last year and it trades 350 basis points lower than Praxair based on 2017 estimated enterprise value (EV)/EBITDA ratios. “Using a simplified M&A model, and assuming only nominal synergies of 3%, a 4% cost of borrowing, and a 50% cash offer, we estimate Praxair could offer a 26% control premium and still achieve an 8.0% return on invested capital (ROIC)” three years after deal close, Alexander says.
By Robert Westervelt
Source: Chenical Week
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