The BOC Group currently finds itself in familiar territory, with an unsolicited offer by the Linde Group to acquire the company, 6 years on from the last offer to acquire BOC by Air Liquide and Air Products.

However, in May 2000, the bid by the two gas companies failed on regulatory grounds in the US. Now BOC faces the onslaught from Germany following the offer (proposal) by the Linde Group \\$quot;“ gasworld investigates the build up to this and the possible outcome.

On Tuesday 24th January, BOC made a statement to the London Stock Exchange following rumours the evening before of an offer to acquire the company which sent the shares upwards from a level of around £11.50 a share to the high £13.

The statement essentially confirmed that BOC had indeed received a proposal from Linde Group, that the board had given consideration and had rejected the proposal on three grounds:

  • The full financing was not in place.
  • The anti-trust issues were not satisfactorily resolved.
  • The offer did not clearly value the growth of the company over the next 2 years \\$quot;“ especially in the Asian/Far East region.

Linde made a statement later in the day clarifying the situation in which they had made a cash offer for the company at £15, valuing the company at £7.6 Bn and that the offer had been rejected. Shares rose to as high as £14.98 at one point with the London Stock Exchange anticipating a possible revised offer by Linde.

In simple terms BOC is now an acquisition target and it is more of a case of when not if!

Interestingly, BOC had their AGM on the 27th January and there were statements made pre and post the shareholders meeting by the Chairman, Rob Margetts and CEO, Tony Isaacs. Both have explained in the past week that the unsolicited offer was subject to a pre-condition of regulatory clearance as there would be some anti-trust positions that would be created by the 'merged' business. This was a concern to the BOC board as they did not want the company to go through another 6-9 month period of instability while regulatory acceptance was sought.

The proposal was conditional on financing arrangements that had to be finalised and that this itself would be subject to a period of due diligence. Finally both Margetts and Isaacs voiced their opinion that the offer undervalued the business and did not take into consideration the growth the company will experience in 2006 and 2007 when a major investment programme BOC has undertaken starts to produce returns.

However, they added that BOC would examine further proposals if they were put to them.

So how has BOC found itself in a position in which it is being targeted by a smaller gas company than itself and what is a fair price for the company?

For many years in the late 1980s and early 1990s, BOC was linked to acquiring AGA \\$quot;“ the Swedish based gases company but while talks definitely took place, BOC was never prepared to pay the premium for AGA\\$quot;s gases business. AGA was eventually acquired by Linde Group in 1999!

In 1999, merger discussions took place between Praxair and BOC \\$quot;“ which would have made a very interesting company. Praxair having been spun out of Union Carbide in 1991, was a fast growing, profitable company and had acquired a major gas company, Liquid Carbonic, in 1995/6 to become a major global gas company as well. Such a merger would have made a powerful rival to Air Liquide as the combined entity would have a strong geographical presence, would have been more efficient and had a strong technological portfolio as well. However, the marriage was never made, due to apparent managerial role differences between the two CEOs.

However, the announcement that merger discussions had been called off (May 1999) sent a signal that BOC was in play, and not long after that both Air Products and Air Liquide entered into a bidding race to acquire the company. Realising that the BOC board were playing each other off \\$quot;“ they decided to make a joint bid and made an offer of £14.60 for the company, which was accepted by the BOC board.

This offer was viewed as high by city analysts as BOC was certainly not performing that well compared to its peer group (especially in gases) but remember the stock market was high at the time and actually BOC was a larger company then.

What happened? The offer went into a period of regulatory investigation and discussion, mainly in Europe and the US. Air Liquide and Air Products had decided to carve up the company around the world and while divestments were needed in Europe, the proposal was eventually accepted by the European Commission. The whole deal fell flat the other side of the 'pond', when the Federal Trade Commission (FTC) and the two gas companies failed to agree on the necessary divestments needed in the US. BOC was to remain single, unattached and needed to re-group after the 9-month onslaught. BOC management were effectively exhausted with all the internal due diligence, the vetting process by each company on where management would end up (in which camp) and some people even left before the end, not wanting to remain in the industry.

The Linde bid sent the shares upwards from around £11.50 to the high £13///

2000 Onwards

During the Air Liquide/Air Products bid, BOC lost one CEO \\$quot;“ Danny Rosenkrantz, Tony Isaacs was appointed caretaker CEO but this was confirmed following the bid collapse and he set about dramatically re-structuring the company. As an accountant he knew he had to turn the company around, improve the bottom line and improve shareholder value following the collapse of the share price.

In the past five years Isaacs has successfully achieved this goal (reaching 15% ROCE). BOC began the re-shaping by reducing the headcount, improving efficiency of its operations and divesting of non-core or under-performing businesses. BOC exited some geographies such as Russia and Turkey. The company exited the plant building process and formed a jv with Linde Group to build/supply plants and finally the company decided to divest of its underperforming packaged gases business in the US.

It has not all been a period of divestment, the company has acquired selected businesses where it felt they would add value to existing business and acquired Praxair\\$quot;s Polish business and also Unique Gas in Thailand where it had an LPG and Ammonia business.

The results over the past 5 years shows the improvement that BOC has made and this continued in 2005. BOC also announced the divestment in its healthcare (hospital) business in South Africa. In reality we understand that a sizeable part of this business remains within BOC for divestment in the future.

The problems analysts have had with BOC is understanding the company\\$quot;s strategy (other than cost control) and where was it going to grow. The company cut down on capital expenditure in the period of 2000 to 2003 and only began to raise capital expenditure in the last 18 months to invest in the numerous projects needed in both hydrogen and air gases.

BOC\\$quot;s share price has swung considerably over the past 5 years \\$quot;“ ducking below the £7 level through a combination of low stock market levels and the threat of litigation from welding fumes. Rumours have been circulating for 3 years on a possible deal with Linde following the initial tie up on the technology front.

BOC \\$quot;“ the Future?

In reality the future relates to the question: What is BOC worth? According to Linde - £15 a share. There is a mixed reaction to this price and obviously there are hurdles to be crossed. Some analysts and industry observers thinks this is high. It represents a multiple of 10 times EBITDA and could be viewed as the going rate for bids in the gases business. However, will Linde achieve the synergies \\$quot;“ the aim being to bring the final level down to 7-8 x EBITDA.

The positive part of such a deal is that there is little geographic overlap and hence a relatively low level of anti-trust issues (confined to the US, Poland, the UK, Australia and a few other countries) and resultant divestments needed on regulatory grounds. However, this presents a problem for the new entity \\$quot;“ where to shed costs. Clearly head offices in the UK and the US can go but what else?

Clearly the new entity will need to divest of non-core parts of the business to pay down the huge debt Linde will incur on the deal. However, what other strings are attached before the final price is settled. The BOC Pension fund has a sizeable hole that the Trustees want plugging (£360m), there is the possibility of a break fee (only applicable if the bid fails) and what about any first options Air Liquide has on the jv\\$quot;s with BOC in the Far East. There are bound to be buy-back options on the jv\\$quot;s in the Far East \\$quot;“ namely Soxal, MOX, HKO and JAG. BOC also has important equity affiliates in Taiwan and Chile and these would need to be assessed. Hence the view that the offer is a good one.

However, other analysts are talking in the press about a final value of £16.00 or above. Any such offer must be seen against the true cost savings that are achievable.

Is there a chance of another industry bidder? This would be difficult to see because of the much larger anti-trust issues that would exist and would present the BOC board with the same dilemma \\$quot;“ a lengthy period of due diligence and regulatory approval.

What about a non-industry play? Last year BASF were rumoured to be considering an offer for BOC. BASF had a cash mountain to invest and BOC was viewed by some to be a target. These rumours existed and helped boost the BOC share price from mid £9 to mid £11. BASF has recently confessed to an interest in acquiring BOC but stated they saw complications related to the jv\\$quot;s in the Far East.

Other companies such as Shell and BP have always kept a close eye on the industrial gases business and are achieving strong profits from the current high oil prices. However, such companies would be interested in the gas production technology of the gases business and as BOC has outsourced their requirements to Linde \\$quot;“ the attractiveness of BOC from such companies has waned over the past few years.

Here lies one of the problems that has possibly lead to BOC finding itself at the end of another bid. The company has a lot of attractive businesses but is reliant on others to provide the technology to develop growth opportunities. Some industry analysts have always felt that a combination of strong geographical presence and reasonable deal-making skills is not enough to survive in this business.

So where next for BOC?

Clearly BOC\\$quot;s management has to continue to maintain the company\\$quot;s improving profitability and will be challenged to do this in the next two years when some significant projects come on-stream this year and next. Tony Isaacs is due to retire in early 2007 and so a new CEO will need to be in place then. We, like all of the industry, continue to keep an eye on the newscasts (see up to date news on to see the next move in this interesting chapter in BOC\\$quot;s history.

The Background

BOC dates back over 100 years ago when the Brin brothers formed Brins Oxygen company in 1886. The company was renamed British Oxygen Company in 1906. In the 1900s, the company expanded to other countries around the world, either by direct investment in other countries \\$quot;“ mainly those within the old British Empire (or now Commonwealth) or through acquisition. The company became the No.2 gas company (to Air Liquide) and one of the few regionally located companies. It was in 1978 when the company became a truly global company when BOC acquired control of Airco in the US and established an important position in the US market.

Since then the company has had varying success within its overall business portfolio, exiting businesses such as the Ohmeda Healthcare Business but acquiring smaller gas businesses around the world but no substantial investment (acquisition) has ever been made.