Breaking Analysis
Following the sensational news that Air Products has made a renewed attempt to acquire fellow US gases distributor Airgas Inc., what affect will this have on the North American gases business?

The proposed deal, which is still in its infancy, is undoubtedly the biggest development in our industry so far this year. It also injects a dose of confidence or optimism into an expectedly more positive 2010.

In a nutshell, Air Products has made an offer to acquire Airgas for $60.00 per share in cash – which represents a deal worth around $7bn in total.

At $60.00 per share, the offer provides a 38% premium to Airgas shareholders based on yesterday’s closing price of $43.53 and is 18% above Airgas’ 52-week high. The total value of the transaction is approximately $7bn, including $5.1bn of equity and $1.9bn of assumed debt.

But it's worth pointing out that this is far from a done deal. Airgas confirmed receipt of the proposal with a rather resolute response of its own.

The company confirmed receipt of the ‘unsolicited proposal’ and noted that it’s Board of Directors ‘will review the proposal with its financial and legal advisors’.

‘Airgas shareholders,’ the statement continued, ‘are advised to take no action at this time’.

But what could any deal mean for the North American industrial gas market?

If successful, the deal would represent a huge shift in the industrial gas landscape in North America – and even beyond.

Described as a ‘compelling transaction’ by Air Products Chairman, President and CEO John McGlade, the offer fully values Airgas’ complementary capabilities and attractive long-term prospects.

Headquartered in Pennsylvania, the combined company would be the largest industrial gas company in North America and one of the largest in the world, with distinctive strengths across all geographies and in all three distribution channels: packaged gases, liquid bulk and tonnage.

Indeed, with figures from leading independent industrial gas consultancy Spiritus Consulting suggesting that Airgas operates with North American packaged gas sales of just over $1.7bn, the deal would be a huge coup for Air Products. Adding this number to the company’s existing sales, the combined entity would be flexing considerable muscle in the market – anti-trust issues aside.

A combination of the two companies would also be financially and strategically compelling, with Air Products projecting substantial cost synergies of $250m by the end of year two, and ‘the ability to accelerate growth both domestically and internationally’ by leveraging Airgas’ extensive US sales force and packaged gases skills on the foundation of Air Products’ global presence and infrastructure.

McGlade said in a statement, “This is an extremely compelling transaction with undeniable strategic and industrial logic that would benefit shareholders, customers and employees of both companies.”

“Bringing together these two highly complementary companies would create substantial value. We highly value the talented operating team at Airgas, and believe they would benefit greatly from the expanded opportunities and resources available to them as part of a larger and stronger global US company with significantly greater long-term growth prospects than a stand-alone Airgas.”

Great interest
It’s also a development of great interest to all those watching from afar, with the arising possibilities seemingly endless.

John Raquet, Managing Director of Spiritus Consulting, told gasworld, ““This is an interesting development. If successful, Air Products would become a fully integrated gas company in the US for the first time since it sold its cylinder business to Airgas in 2002.”

There could, of course, be some anti-trust issues raised both before any deal goes through, and as a condition of the deal.

Marcus Jakt, Research Associate at Spiritus, exclusively added, “It seems somewhat difficult to believe that there wouldn’t be some (even perhaps quite a lot of) pain ahead from an anti-trust point of view – were this deal to proceed.$quot;

$quot;Still, if Air Products have done their homework, then other gases majors have probably already been lined up as possible candidates to take on Airgas or Air Products assets in parts of North America where required divestments are most likely to occur.”

Far from a done deal
Airgas has confirmed the approach with a resolute response of its own, however.

In a statement released later today, the company confirmed receipt of the 'unsolicited proposal' and noted that its Board of Directors will 'review the proposal with its financial and legal advisors'.

‘Airgas shareholders,’ the statement continued, ‘are advised to take no action at this time’.

The company acknowledged Air Products’ previous two offers, which ‘after consultation with its financial and legal advisors’ Airgas unanimously determined 'were not in the best interests of Airgas or its shareholders, as they grossly undervalued Airgas’.

The company has also circulated a letter of response to those previous offers, sent to Air Products earlier this year, in which Chairman and CEO Peter McCausland politely outlines the reasons for its steadfast refusal so far.

Air Products appears undeterred by any distractions though, and has underlined its determination to complete the deal.

The company notes that it is ‘fully committed to pursuing this transaction, and has secured committed financing from J.P. Morgan to complete the offer’.

In the same statement, the company explained, ‘Air Products is prepared to make appropriate divestitures to address regulatory issues’.

McGlade concluded confidently, “While we are disappointed that Airgas has thus far prevented its shareholders from receiving a substantial premium and immediate liquidity, we have repeatedly communicated to the Airgas Board our willingness to improve our offer to reflect any incremental value they can demonstrate.”

“While it remains our strong desire to reach an agreement with Airgas on a friendly basis, we are fully committed to pursuing this transaction and are prepared to take all necessary steps to complete it, including making an offer directly to Airgas shareholders.”

Sounds ominous. The transaction may prove to be far from a landslide takeover deal and a number of factors have to be respected, including the reaction of Airgas itself. The next few days and weeks could be very interesting indeed.

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