Mergers and acquisitions form an important part of our industry’s growth, but sometimes there are some major surprises...

Industrial gas professionals have been glued to their internet enabled phones lately as the Air Products proposed takeover of Airgas drama continues to get more and more interesting; this being a ‘hot’ topic, it seemed only right to explore the highs and lows of a situation which is practically on fire as gasworld went to press.

On 5th February, after two ‘private’ approaches had been rejected by Airgas, Air Products announced it had made a public offer directly to shareholders, to acquire Airgas for $60.00 per share in cash – a deal worth around $7bn in total. Having initially taken a friendly approach, Air Products has decided to turn hostile.

The offer was promptly rejected by Airgas, which claims it ‘significantly undervalues’ the company and its future prospects, and is not in the best interests of Airgas shareholders.

It’s clear that a number of exchanges have occurred between the two companies and respective CEOs; a letter published by Air Products suggests relations are far from rosy, and implies a concerted effort will now be made to put pressure on Airgas, by targeting its shareholders.

The motives
In 2002, Air Products sold its US Packaged Gas business to Airgas, in order to focus on being a leading US producer of tonnage and merchant liquid bulk gases.

Why then, just eight years later, is the company so intent on trying to take on a large packaged gas business in the US?

Tim Jones, Head of Industrial Gases Equity Research at Deutsche Bank, told gasworld, “I do not see it as a particularly good deal for Air Products.”

He did however offer one possible explanation, adding, “This deal is perhaps reflective of the fact that Air Products is struggling for growth in many of the emerging markets, compared to its global gas peers, and so is now having to look to M&A to supplement the organic growth opportunities within the company.”

Airgas itself is a company built through acquisitions, therefore one possible reason for Air Products wanting to take the company over, is to hone in on its acquisition skills, in order to break into emerging markets.

Over the past two years, Air Products has been busy slimming down and focusing its business on core industrial gas activities, divesting its chemical business and also parting with its poorly performing US healthcare business, suggesting this may have been a well thought out plan.

Marcus Jakt, of Spiritus Consulting, told gasworld, “A successful dynamic company has to aim to want to grow. On that basis, the packaged gas activities of Airgas fit well into the overall industrial gas perspective of Air Products; it makes sense to be active within all areas of the industry – from large (onsite) to medium-sized (bulk) to smaller (packaged gas) customer segments. Air Products has some very successful and profitable businesses around the world that are fully integrated.”

“By absorbing Airgas, Air Products could conceivably re-engage with the North American packaged gas market on a much more sustainable basis than it could previously.”

The deal
The situation now seems to have reached a point where it will be down to the shareholder to decide the outcome. Jones (DB) suggests the deal will go through, commenting, “Airgas is probably holding out for a slight price increase.”

Airgas clearly thinks the deal falls short of what the company is worth, and Air Products thinks it is being generous, so who’s right?

Looking back to 2006, Linde paid 10.9 times EBITDA for BOC, although it should be noted that this was not all gas. In 2007, Air Liquide paid 8.5 times EBITDA for Linde Gas in the UK.

Based on Airgas’ fiscal 2009 figures (mainly 2008 trading), the current offer from Air Products amounts to around 9.4 times EBITDA. Given the current financial climate however, fiscal 2010 figures will be significantly lower, which means that Air Products’ offer is currently at a 10.5 multiple of current EBITDA.

Looking at the multiple of EBITDA Linde paid for BOC, and the future growth prospects Airgas has to offer, some analysts might consider this offer to be undervaluing the company.

Furthermore, Air Products is offering Airgas shareholders $60 per share, when the shares are currently worth in the region of $65 on the stock market.

However, some believe the offer is reasonable. According to John Raquet, CEO of Spiritus Consulting, the offer for a business that is 90% related to the distribution business, appears reasonable, as in general, typical valuations for distributors in the US have ranged between 5-8 times EBITDA. He feels a final value may be around 11 times current EBITDA, which equates to close to the $65 mark.

The nature of the assets on offer is different in the case of Airgas, compared to BOC or other major gas company; secured cash flow is critical when valuing a business, and therefore when comparing Airgas – which only has few ASUs and a lot of small customers – to a company like BOC – which has a large on-site business – the latter offers much more security.

Over the fence contracts can range from 10 to 20 years, and therefore theoretically one would expect a company like BOC to command a higher price than Airgas, as cash flows can be secured for a much longer length of time.

Additionally, when evaluating the worth of a gas company, return on capital employed (ROCE) is important. An ‘acceptable’ ROCE, or Return on Capital Employed, for a Tier 1 player, is considered to be in the region of 13-13.5%.
Looking at 2008 figures, Air Liquide’s ROCE ranged between 13.8-15.5%, and Praxair’s was between 17.2-20.3% – Airgas’ however was significantly lower at 12.9-14.8%.

This again comes down to the nature of the business; as a packaged gas business Airgas typically spends a lot more money on manning, running and maintaining its distribution points, as well as on the upkeep of its cylinders, than a bulk or onsite company.

The future
If successful in its bid for Airgas, Air Products would become the biggest industrial gas company in North America. However, analysts do foresee that some divestments will be needed, for anti-trust reasons.

Airgas has several poison pills in place, but as Jones suggests, “Poison pills do not stop a takeover, they merely slow the process down.”

He added, “I think it will go through, ultimately it’s the shareholders that own Airgas, and they will decide this.”

In a statement to gasworld, Airgas said, “The Air Products offer is opportunistically timed and it grossly undervalues Airgas, as it fails to reflect the value inherent in Airgas’ future prospects, historical results and strong competitive position.”

“At Airgas, we remain 100% focused on running our business. As always, we are committed to serving our customers and to providing the best solutions to meet their needs.”

Airgas seems extremely defiant, and Air Products, extremely committed, but one is bound to make another move sooner or later, and the next chapter will undoubtedly be just as gripping.