The earth shook in the global gases business last week, with the news that Air Liquide had agreed the $13.4bn acquisition of fellow Tier One company Airgas, Inc., signalling a potentially seismic shift in the structure of the industry.
Should it meet with the necessary regulatory and shareholder approvals, the deal will create comfortably the biggest industrial gas group in the world.
The combined company will be the leader in North America, complementing number one positions in Europe, Africa/Middle East and Asia-Pacific. It will also be number one in the Industrial Merchant and Large Industries sectors, and co-number one in Electronics, globally.
Air Liquide had arguably already been edging its nose in front in recent years, certainly by value, I understand. Now the deal for Airgas firmly puts a flag in the ground as the undisputed leader; Gas and Services sales alone are set to increase by around 30%.
Put simply, it is the biggest deal in the industrial gases business since The Linde Group’s acquisition of the BOC Group for $14bn in 2006/7.
So has it been a long time coming?
The industry’s focus of late been inward on improving the bottom line, while most of the big deals within the industry had arguably been done, leaving only consolidation on a smaller level in pockets of growth around the world.
With economic prospects relatively modest over the next five years, however, and organic growth looking increasingly difficult to achieve, gasworld asked back in April if there was room for one more big deal within the global industrial gases industry.
While there was a feeling among the industry’s esteemed consultancies that such a deal would prove unlikely, given both the similarly sized market capitalisations of the six major players and the inherent cultural differences between many of those companies, the idea of a new ‘superpower’ being created could not be dismissed.
The name emerging from many of those trains of thought was Airgas. The 33 year-old company has clearly been an attractive business proposition for some time now, evidenced by Air Products’ failed – and ultimately hostile – takeover attempt in 2010. Perhaps these overtures had planted the seed. But there is little doubt about the company’s saleability.
In relatively quick order, Airgas has built a position of leadership in the US packaged gases market, and associated products and services, and continues to grow its customer base of more than one million with sustained strong acquisition activity in the distributor business. The company boasts a national network of more than 950 branches spread across 15 regions, comprised of retail locations, cylinder fill plants, gas production facilities, specialty gas laboratories and regional distribution centres.
Such a portfolio clearly captured the imagination of Air Products just five years ago. This, in turn, captured my own imagination when the news broke of its first moves to acquire Airgas on 5th February 2010. Air Products had offered $60.00 per share in cash in a deal worth around $7bn in total, then representing a 38% premium on the prior day’s closing share price of $43.53. It looked to be a hugely significant deal in the making.
But it was an offer that would prove to be ultimately doomed, resolutely rebuffed throughout the year and deteriorating into a seemingly bitter war of words between the two companies, played out in public statements and counter-statements. Just over 12 months later, on 16th February 2011, the story was brought to a contentious close with the upholding of Airgas’ so-called ‘poison pill’ Stockholder Rights Plan by a Delaware court, and the withdrawal of Air Products’ revised and extended offer.
So what’s different this time around?
Paying a premium
Though the war of words that continued to wage throughout Air Products’ attempt to take over Airgas will hardly have endeared both parties to each other, the ultimate factor in failing to get that deal over the line was the company’s valuation.
Despite Air Products’ initial offer representing a premium of 38% – Linde paid a 39% premium on the closing price per BOC share on 23rd January 2006, the last business day prior to the announcement by BOC that it had received an approach – Airgas felt it significantly undervalued the company at the time. Given the way Airgas has continued to grow since then, one would have to say that thinking has been vindicated.
The ‘body language’ this time around appears to be very different.
Both Benoît Potier – Chairman and CEO of Air Liquide – and Peter McCausland – Executive Chairman of Airgas – described the compelling value for the latter’s shareholders. Both parties cited the former’s ‘vision’. And while McCausland paid tribute to Air Liquide’s ‘strong heritage’ in the US, Potier spoke of the ‘highest respect’ for Airgas, its organisation, its employees and stakeholders, and its achievements to date.
If the vibe is different this time around, then so too is the offer.
Air Liquide’s offer will see Airgas shareholders receive $143 per share in cash for all outstanding shares, representing a total enterprise value of $13.4bn (€12.5bn at current exchange rates) on a fully diluted basis and including the assumption of Airgas debt.
The transaction represents a premium of +50.6% to Airgas’ one-month average share price, prior to the announcement of the transaction, and of 20.3% over Airgas’ 52-week high share price. Air Liquide clearly feels the acquisition is one worth paying a premium for.
Despite Air Liquide’s shares falling 7% on announcement of the proposed deal, the general consensus among the M&A community agrees it’s a premium worth paying – in the long-term.
One US-based M&A advisor I spoke to last week believes Air Liquide has overpaid by $3bn – or 20% – based on the current value of the company. “The notion appears to be supported by Air Liquide’s shareholders, as it lost $3.4bn in value based on the announcement while the overall market was slightly up,” he added.
He did, however, acknowledge that the long-term business proposition should not be overlooked and ventured that, if he were an Air Liquide executive, he would still have gone ahead with the deal.
This conviction is based upon several favourable factors. Firstly, as previously mentioned, such growth is both difficult and expensive to realise organically, rendering Airgas a better long-term proposition. Secondly, there are thought to be considerable synergies from the deal, as explained by gasworld’s own analysis, beyond the $300m already outlined by Air Liquide. As a largely packaged gases-led business, surely there will be even more gains to be made in the years ahead too, as the field of asset management technologies continues to mature and ‘lost’ cylinders become a thing of the past?
Thirdly, given that there are 1,000 or less independents left in North America, it would be costly, time consuming and difficult to replicate Airgas’ presence – while also foregoing Airgas’ $1bn in annual EBITDA.
All of which points to a deal worth going the extra mile for. That’s before even trying to estimate the value in ownership; with Airgas proving to be a long awaited acquisition for several years now, Air Liquide would surely sooner have the company within its empire – and accretive – than competing against it.
Time will tell if the deal does represent good value. But from here on in, Air Liquide seems set to become the world’s largest supplier of industrial gases – a tag you could be forgiven for saying is priceless.