Mergers and acquisitions (M&A) have been very much the story of the global industrial gases business over the last half-decade, as companies big and small have sought to acquire market share and buy into bigger, faster growth than the market at large affords.
This has culminated in two of the biggest shake-ups in the order of the industry, the latest being the $70bn merger of Praxair, Inc. and The Linde Group that creates a new, undisputed leader in the global gases business.
Both companies have long sat at the top table in the industrial gas business, as ‘Tier One’ players that each boast more than $1.2bn in annual sales, respectively. It’s a select club and in merging, one that Praxair and Linde have shaken up the order in.
The Tier One table has for the last decade comprised of Airgas, Air Liquide, Air Products, The Linde Group, Praxair, and Taiyo Nippon Sanso Corporation (TNSC) – all comfortably exceeding the $1bn revenue criteria.
Though it had long been regarded as one of the industry’s biggest players, Messer officially joined this bracket of companies in 2011 when it broke the billion barrier, posting worldwide sales of €1.029bn. Technically, both China’s Yingde Gases and Japan’s Air Water are also now among this esteemed group of leaders, posting annual sales of $1.15bn and $1.3bn in 2015, respectively.
But Air Liquide, Air Products, Linde and Praxair are far and away the bigger players, regularly posting annual revenues of circa $10bn+. As a result they have been responsible for a commanding share of the global industrial gases market and jockeyed for regional leadership positions. As of 2015, and prior to Air Liquide’s huge acquisition of Airgas, the company had been battling it out with Linde for number one status, according to gas world Business Intelligence.
|Company||Market Share (2015)|
*Other producers – 13%; Other distributors – 11%
When Air Liquide moved to acquire Airgas at the end of 2015 and subsequently completed the $13.4bn deal on 23rd May 2016, it nudged ahead of its rivals (chiefly Praxair) in the all-important North American market and complemented leadership positions in Europe, Africa/Middle East and Asia-Pacific – pushing itself a few percentage points clear in global market share in the process.
Now we’ve seen fellow Tier One players Praxair and Linde make their strategic move, coming together in a mega merger of equals that comfortably establishes a new and undisputed leader in the marketplace. Pre-divestment, the merged entity is expected to command a market force of around 33% (gas world Business Intelligence). It’s a move which is not only expected to leverage strengths and realise annual synergies of an estimated $1bn, but also shuffles the seating plan at the top table for the second successive year.
|Company||Projected Market Share (2017), Pre-Divestments|
*Other producers – 13%; Other distributors – 11%
If this were a game of industrial gas chess, then Praxair-Linde just moved into a checkmate position. So what next for the industry’s top table – who makes the next move?
While the thought of continued industry consolidation is not a pleasant subject for many, it is widely felt that it’s a trend that will likely continue.
James Barr, Senior Business Analyst at gas world Business Intelligence, commented, “The smaller Tier Ones, such as Air Products, Messer and TNSC, will now be looking to catch up with Air Liquide, Praxair and Linde. Air Products had already made a (failed) move to acquire Chinese company Yingde, while TNSC has been very active in South East Asia and Australia in terms of acquisitions.”
Matt Caras, co-founder and Managing Director of M&A advisory firm Leaders LLC, recently concurred, “Even in industries where companies are seeing significant organic growth today, companies are growing through acquisition. Acquisition growth strategies have always been popular because through acquisition a company can ‘acquire’ far more than just additional revenue.”
“I would expect more deals. Given the size of the players, they will inevitably make regional or market missteps that will provide opportunities and potentially necessitate M&A”
Wayne Twardokus, League Park Advisors
But was Praxair-Linde the last hurrah in terms of major M&A activity between the Tier One players? It’s a question gas world has asked before, and the response is once again one that cannot seem to rule anything in our out. Barr mused, “I think that the events of the past 18 months tell us that no merger or acquisition is totally out of the question.”
“With respects to Air Products, Messer and TNSC, a combination of two of these three company’s businesses for example could be very complimentary, and hold many synergistic and geographical benefits.”
Wayne Twardokus, Director at League Park Advisors, also expects more deals and pondered the idea of another coming together of two of the industry’s biggest players. He said, “I would expect more deals. Given the size of the players, they will inevitably make regional or market missteps that will provide opportunities and potentially necessitate M&A.”
“It is unclear if this will result in a large deal; however, your suggestion of a producer such as Air Products benefiting from TNSC’s distribution footprint could be very interesting.”
When studying the market shares pre and post-recent M&A activity, one can’t help but look at Air Products’ steady 12% slice of the pie; that needle hasn’t moved throughout, and with the company seemingly the subject of much strategic scrutiny in recent years, it begs the question whether Air Products might strike next.
The company pretty much pre-empted this new wave of M&A within the industry with its failed – and ultimately hostile – attempt to take over Airgas in 2010.
Its offer to buy Airgas at a $60.00 per share price (an approx. $7bn deal), then representing a 38% premium on the prior day’s closing share price of $43.53, looked to be a significant deal in the making. But it was an offer that would be resolutely rebuffed throughout the year and deteriorate into a bitter war of words between the two companies that 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 and the withdrawal of Air Products’ revised and extended offer.
Five years later, and Air Liquide had rapidly closed in on the acquisition of Airgas itself, a deal welcomed by both parties and with a very different vibe throughout. In the midst of that mega deal, new Air Products Chairman, President and CEO Seifi Ghasemi was staunch in his reflection, “There has been some speculation that we are going to participate in any kind of bidding for Airgas. We are not going to do that. We think a full price has been paid and therefore we have no intention of participating in any kind of bidding for that asset.”
“A lot of people are saying that the industrial gases business is in trouble and all of that. We don’t see it that way. We have done a lot of work at our company and feel very confident about our business and our way forward.”
But in the wake of Air Liquide’s takeover of Airgas, we have now also seen Praxair and Linde agree to a merger of equals that once again changes the face of the global gases business and those seats at the coveted Tier One table. So could a failed acquisition of Airgas all those years ago be a source of regret for Air Products?
Twardokus doesn’t think so. “I am sure there is from a strategic/operational side as it would have been a good marriage. [But] I’m sure their executives believed they provided a full price and it is possible they may have struggled managing the business with a higher potential debt load, or the market may not have supported a richer structure at the time.”
Regardless of what could or should have been, Twardokus is adamant Air Products is not being left behind. He explained, “Air Products is doing a good job of creating focus with the strategic realignment and believes it will create a unique set of opportunities. It is possible some will believe that they appear to be left behind, but the new focus of the business should help drive growth and shareholder value – each business now has a laser focus.”
So what next for the Tier One club? Who makes the next move in this global game of chess?
If the verdict is that more M&A is largely inescapable, then it seems unlikely that this would involve either Air Liquide, Praxair or Linde on a major scale, as they focus on the implementation and financing of their recent endeavours for some time to come. TNSC continues to pursue its overseas growth strategy as it strives to build business density beyond Japan, especially so since the heavy investment backing from Mitsubishi Chemical Holdings Corp. in 2014, which would suggest further moves could be afoot from the company going forward.
Meanwhile, the Messer Group has been adamant for some time about its focus on the core markets and geographies that it participates in; so while the company could in theory pick up any divested assets from the Praxair-Linde merger, it’s yet to be seen whether any major movements could be expected from the company in the immediate future. It’s certainly not something to be ruled out.
For Air Products, in early 2017 it seemed the future could involve the integration of Yingde Gases into its stable following its move to acquire the group. That prospect ultimately disintegrated, with the company withdrawing its offer for the fast-growing yet managerially-troubled Chinese outfit. Air Products continues to up the project ante in China, however, so is it conceivable that the company’s future could be based around a new dawn in the high-growth Asia-Pacific region, with less emphasis on its native US market?
“Yes. They have generated shareholder value with the split of the company and need to establish/fortify positions in growing markets,” Twardokus observed. “The equity markets demand growth and they need to be properly positioned to drive earnings per share (EPS) growth. Despite the slowdown in Asia, its markets are expected to expand a lot faster than the US.”
Read more insight and analysis of the $70bn merger of equals between Praxair, Inc. and The Linde Group, at gas world’s dedicated Praxair-Linde Zone.