“We all have dreams. But in order to make dreams come into reality, it takes an awful lot of determination, dedication, self-discipline and effort.”
Those were the words of infamous track and field athlete Jesse Owens, winner of four gold medals at the 1936 Olympics in Berlin, Germany.
I’m cautious not to draw parallels of any kind between such iconic cultural and political events as that quote, at that time, and what are relatively straightforward business deals - and yet that sentiment seems pretty pertinent when analysing the merger of Praxair and Linde, two heavyweights of the global industrial gases business.
With the confirmation that the transaction is officially complete, the biggest deal in the industry to date is recorded and with it, a new chapter in the intertwined history between the two companies.
‘Dream’ might be too whimsical a word for it, but if it was a vision of the powers that be at Praxair or Linde to realise a $70bn global gases leader, then they certainly showed the kind of tenacity and dogged determination that Owens described to author that new chapter. The signs were there very early on.
With the breakdown in original talks – over a lack of ‘mutual understanding’ – we saw the immediate departure of Linde’s Chief Financial Officer Georg Denoke, less than 24 hours later. It was also announced that CEO Dr. Wolfgang Buchele would not stand for a second term in April; he would effectively be leaving too. Whether it was the case or not, both statements felt like a cleaning of the stable to ensure a revival in talks with their opposite number, and with trademark German efficiency.
Then there came the next act of visible determination; Praxair revealed its approach to resume talks at the end of November. Linde confirmed the approach and its intent to review the merits of those talks a week later. Shortly afterwards came the news that parties had reached provisional agreement, announcing a non-binding term sheet governing the essential terms of a merger of equals.
In doing so, Linde revealed the immediate departure of Dr. Buchele, demonstrating great dedication and self-discipline in accelerating his exit for the greater good of the deal, of the dream. The returning Professor Dr. Aldo Belloni was instantly drafted in as the group’s new CEO, as Linde showed its own hand of determination in bringing an experienced custodian back to the helm to oversee both negotiation and transition; along with fellow returning Linde statesman Prof. Dr. Wolfgang Reitzle, Prof. Dr. Belloni had overseen the hugely successful acquisition of the BOC Group 10 years earlier.
As I wrote at the time, this seemed to be a deal that both sides desperately wanted to get over the line – and with good reason.
The deal becomes the third major piece of M&A in the industry in a decade, but by far the biggest; it comfortably eclipses Air Liquide’s earlier $13bn acquisition of Airgas.
”The deal becomes the third major piece of M&A in the industry in a decade, but by far the biggest; it comfortably eclipses Air Liquide’s earlier $13bn acquisition of Airgas”
With the merger of Praxair and Linde, we’re once again reflecting on a seismic shake-up in the global gases business. It’s the gold medal of industrial gas mergers. But is all that glitters really gold for the industry? This $70bn deal throws up a number of questions for the global gases business. Here’s three talking points that immediately come to mind.
Divestments are inevitable on any deal of this magnitude in the gases industry, and we saw as much with the Air Liquide-Airgas acquisition last year as MATHESON and Aspen Air arose as the two lead protagonists in picking up assets sold-off as mandated by anti-trust regulations.
I understand the divestitures in any merger of Praxair-Linde may be to the tune of around $1bn worth of business in the US – over three times that of the Air Liquide-Airgas divestment package.
It’s highly likely that the relevant anti-trust authorities will be picking through the complexities of the deal with a fine-tooth comb, with some attractive businesses up for grabs. Potential overlaps are not just found in the US – there are a number of areas within Europe, such as Germany, the UK and Scandinavia, where both Praxair and Linde have important, dominant operations.
What dreams remain?
Perhaps one of the biggest questions coming out of this surrounds the growth prospects of the wider industry. If two of the industry’s biggest entities felt the path forward was not necessarily one built in organic growth but instead growth through M&A, through synergy, then what does that say for the industry’s growth prospects going forward? Does it point to a lack of tangible organic growth?
Industrial gas companies have been the ‘darlings’ of Wall Street for a very long period of time and given their respective size and maturity, it is naturally difficult to continue to drive attractive earnings per share (EPS) growth. As publicly-listed companies, they have to drive that growth – so perhaps this path forward is inevitable.
From conversations I have had in the investment and consulting community, there’s a broad feeling that near-term growth in Western markets is going to be hard to come by. With the industrial and energy markets continuing to exhibit soft performance, the gas companies need to generate positive EPS growth as public companies.
”If two of the industry’s biggest entities felt the path forward was not necessarily one built in organic growth but instead growth through M&A, what does that say for the industry’s growth prospects going forward?”
There is also a feeling that the M&A of recent years, maybe even the last decade, points to the nature of the companies themselves – they are all becoming more mature and with it, are having to find new channels from which to generate growth. We’re ‘beginning to appreciate that trees don’t grow to the sky’, I was told.
So what does all of this mean for those further down the chain? Well, I understand that there may well be a view from some quarters that all that glitters really isn’t gold. Further consolidation will likely have a negative impact on some equipment manufacturers, with the top gas companies having preferred suppliers and as the number of those Tier One players reduces, certain equipment companies may end up likely to lose out.
The final hurrah?
After gasworld asked two years ago whether there was room for one more big deal within the global gases business, we’ve seen a second successive merger of two of the industry’s flagship players.
If many thought Air Liquide’s $13.4bn acquisition of Airgas last year was the final flourish in mega M&A, then surely this latest merger of equals says anything goes. So could another game-changer lie ahead? Do we dare to dream of one last hurrah in M&A?
I’ve explored this topic quite extensively for gasworld and in short, from the various conversations I’ve had across the industry, we might do well to expect the unexpected. My colleagues in Business Intelligence believe the events of the past 18 months tell us that no merger or acquisition is totally out of the question, while others I have spoken to are even more bullish and advise to ‘expect more deals’.
Given the size of the players, I was told, they will “inevitably make regional or market missteps that will provide opportunities and potentially necessitate M&A.”