Two years ago today, with the ink barely dry on Air Liquide’s $13.4bn acquisition of Airgas, the news sensationally broke that Praxair and Linde were in merger talks.

Speculation and analysis rapidly swirled.

What would it mean for the market? Who could be the winners and losers of the deal? Would such a merger even be possible? What happens next?

Praxair-Linde: A worldwide leader? 

It immediately looked to create the latest chapter in game-changing year of merger and acquisitions (M&A) activity for the global gases business but less than a month later, a prospective deal was off the table, with talks terminated amidst a lack of ‘mutual understanding’.

By year-end (2016), talks were back on. The allure of the deal and an undisputed market leadership position was clearly too compelling to walk away from.

As we look back over the last two years with the inimitable benefit of hindsight, one might argue that stop-start curtain-raiser to this merger of equals set the tone for the ups and downs throughout this rollercoaster ride of a $70bn deal. Departures have been felt, assets have provisionally been sold, and the deal has reportedly not been without its share of protestations.

Both companies have been clear and mutual in their understanding and their goals for the merger, but recent weeks and months have demonstrated that the understanding has perhaps not been quite so mutual between the merger parties and the antitrust authorities that they need to win over.

Such a timeline and statement of objections is not unusual for a deal of this scale and complexity. But with a well-documented deadline of 24th October looming, the mega merger of Praxair and Linde is effectively in a countdown to completion. So where does the merger stand, at present?

US Europe merger

Recap

First and foremost, the definitive agreement on a merger of equals worth $70bn has been signed since 1st June 2017. The parameters are set, and the objectives are clear.

The merger of Praxair, Inc. and Linde AG will create a combined entity that usurps Air Liquide as the leading force in the global industrial gases business. gasworld Business Intelligence has long estimated a combined market share of 33% pre-divestment.

This ‘compelling and transformative opportunity’ will create a company with pro forma revenues of approximately $29bn (€27bn), prior to any divestitures, and a current market value in excess of $70bn (€66bn), based on 2016 reported results. Approximately $1.2bn (€1.1bn) in annual synergies are projected, driven by scale benefits, cost savings and efficiency improvements.

Praxair-Linde: Understanding the rationale

The new holding company will be listed on both the New York Stock Exchange (NYSE) and the Frankfurt Stock Exchange, and will be incorporated in Ireland while its principal governance activities – including board meetings – will primarily be based in the UK.

Corporate functions will be split between Danbury, Connecticut (US) and Munich, Germany to help achieve efficiencies for the combined company, and membership in the management board of the combined company will be split 50:50 between Linde and Praxair. Current Praxair Chairman and CEO Steve Angel will become CEO of the new holding company, while current Chairman of the Supervisory Board of Linde AG, Professor Dr. Wolfgang Reitzle, will become Chairman of the new company’s Board.

We also know that the new holding company will be named Linde plc, perhaps reflecting the two companies’ intertwined histories dating back to World War I and essentially the starting point as a Linde brand.

Praxair and Linde: Discussing a new chapter

A special meeting of Praxair shareholders successfully sought the adoption of the Business Combination Agreement, while the Linde plc exchange offer commenced a year ago yesterday (15th August 2017) and was eventually complete on 24th November with a 92% tendering of ordinary shares.

Antitrust attention

It’s not only the corporate functions that are to be reimagined – the merger, once complete, would also redefine the structure of the industry itself. As a result, the regional antitrust authorities have been scrutineering this deal ever since it was formally lodged.

The merger has received varying degrees of clearance in most of the regions required, including approval in Brazil (conditional) where the deal was thought to be under particular scrutiny, Russia (unconditional) and Canada.

Brazil had also been cited by gasworld business intelligence as one of the major market overlaps for the merger, and the largest hurdle to overcome in South America, with a combined Praxair-Linde company estimated to command a market share valued in excess of 70% before any divestment.

western europe belgium

Two of the most keenly anticipated verdicts, however, had understandably been awaited in Europe and the US, the domestic markets of the two companies, by the European Commission (EC) and Federal Trade Commission (FTC), respectively.

Having reportedly been faced with a confidential statement of objections (SO) from the EC in the days prior, Praxair announced in early July that it had signed an agreement to sell the majority of its businesses in Europe – assets that generated annual sales of approximately €1.3bn in 2017 – to Japan’s Taiyo Nippon Sanso Corporation (TNSC) in a deal worth around €5bn in cash consideration.

Column: This was always a marathon, not a sprint 

The assets to be sold include Praxair’s industrial gases businesses in Belgium, Denmark, France, Germany, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden and the UK and include approximately 2,500 employees – and their planned divestment signals a huge step closer to receiving European clearance for the merger.

In the US, the verdict looks less than clear at the time of writing.

Linde confirmed on 16th July that a consortium comprised of the Messer Group and CVC Capital Partners Fund VII had entered into an agreement to purchase the majority of Linde’s gases business in North America and certain business activities in South America. The business to be sold generated annual sales of approximately $1.7bn (€1.4bn) and an EBITDA of just over $360m (€305m) in 2017 and include substantially all of Linde’s US bulk business, as well as its business in Brazil, Canada and Colombia.

But within just days, it emerged that the FTC had expressed expectations of further divestiture commitments and prospective purchasers for merger clearance to be considered in the US.

Various speculation swirled in the days that followed, ranging from suggestions of a political play surrounding the re-domiciliation of the company to UK shores, to the notion that a change of management at the FTC in the spring may have moved the goalposts on Praxair-Linde’s previous understanding of what would be acceptable.

Whatever the reason behind the verdict, as of writing this piece, Linde and Praxair are ‘analysing these expectations to assess their scope and to evaluate how they could be implemented to achieve a timely clearance of the business combination’.

The discussions with the FTC about the divestiture commitments will be continued in order to achieve a mutually acceptable result. Linde and Praxair remain in a constructive dialogue with the regulators and with each other on the required divestitures.

clock

Countdown to completion

Ultimately, Praxair and Linde continue to aim for completion of the merger in the second half of 2018. More specifically, a deadline of 24th October (2018) exists, as dictated by German financial market rules.

The countdown to completion is, therefore, on. That is, if it happens at all…

Both have previously stressed that they are only prepared to go so far to get this deal over the line, suggesting very early on that if divestments over a threshold of €1.1bn in EBITDA or €3.7bn in total earnings had to be realised, then the merger in its current guise would not; they would step back from the brink to consider their respective positions and potentially look to renegotiate the deal.

With the requirements of the FTC seemingly more onerous than first expected, Linde acknowledged that “there is in addition a higher probability that a threshold for divestiture commitments, which is to be accepted by each contract party under the Business Combination Agreement, will be exceeded.”

The business world – and the gases industry – awaits news of further divestment packages, and just how far Praxair and Linde are prepared to go in under to see this merger through.