For many on the outside, it may seem like the trail has gone cold on this mega merger of equals.
Since the first intent of a combination of Praxair Inc. and Linde AG made headlines in August 2016, it has been a constant churn of news, views and analysis every step of the way. This deal has made waves throughout Praxair’s homeland of the US, Linde’s native German market, and just about every other industrial gas region globally.
Yet there has been little to tease us with for a few months now. Having been through various stages of agreement in principle and shareholder approvals, there is now a certain sense of dormancy during divestment season.
So as we head for the exit doors of Q1 and push on through into Q2, where are we at with this big deal?
Let’s begin by stressing that there is really no clear answer to that question. To most observers on the outside and likely even many of those within both companies, there is little tangible update. Only a chosen few at the heart of this deal will really know what the state of play is right now.
What we do know that could be described as ‘new’ can probably be broken down into four areas.
1. Divestment process – ongoing
From what I understand, the deal is now in the early-to-mid stages of divestment season, during which rumours swirl, numbers are crunched and on the face it, there is little tangible updates to be given.
A great deal of work is going on behind closed doors, but it would be counterproductive – not to mention highly litigious – to make any of that public, hence the apparent dormancy.
From reading between the lines of the business press, it seems that this particular merger is perhaps under more scrutiny than might first have been anticipated; there is a suggestion that the divestment package itself will end up being slightly larger than first thought, as a result.
Right at the very start of this deal-in-the-making, gasworld business intelligence emphasised the sheer scale of the deal and the inevitable divestments, projecting a combined global market share of 33% for the new Linde plc, pre-divestment. Then Senior Business Analyst for gasworld, James Barr, had affirmed, “The deal will almost certainly attract the attention of the FTC and the EC (European Commission)…On a regional level, the company would have market share well in excess of 40% in some countries, indicating that a substantial divestment package maybe required in those regions.”
gasworld Business Intelligence had initially calculated that Praxair-Linde may have to divest of up to $1bn worth of business in the US – about four times that of what was witnessed in the Air Liquide-Airgas divestment package – while potentially major overlaps exist in Europe (Germany, UK and Scandinavia) where both Linde and Praxair have important operations.
“Other divestment opportunities may be witnessed in markets such as India, Thailand and China,” Barr had added.
I understand from reports that there is local apprehension, if not strong opposition, to the deal in Brazil. Many will of course remember the ‘cartel case’ which emerged in Brazil in 2010, highlighting the fractious air of contention in the region’s gases business. It is reportedly feared that the merger of Praxair-Linde will result in an even further concentrated market and future price increases.
Such challenges are to be expected in a deal of this ($70bn) magnitude. This is also consistent with mega mergers in other sectors in recent years, not least the wider chemicals and refining business. We have heard in the last few weeks, for example, that the European Commission is officially opening an in-depth investigation into the merger.
gasworld has previously cited Europe as one of the key issues of a potential merger, with both companies holding significant current operations in Northern Europe and Scandinavia. Praxair relatively recently acquired Yara’s European carbon dioxide (CO2) business which, if combined with Linde’s current CO2 operations, is likely to create ‘an entity too large to be left unnoticed by anti-trust authorities’. This could lead to a number of divestments in the countries such as Sweden and Norway, where Linde currently holds commanding market leadership positions, Barr said last year.
Some of the largest European markets are also likely to be affected. In Germany, the combined Praxair-Linde company would hold a market share of almost 50%, prior to any divestment. Therefore, a divestment package including a tempting portfolio of air separation units and CO2 plants may be revealed in due course.
Another region that could be scrutinised in more detail by anti-trust authorities is Iberia – Praxair and Linde currently hold reasonable market shares in both Spain and Portugal. The new company would potentially hold a market share of under 40% in both countries, which may also be drawing attention.
The Commission has said it was particularly concerned about the merger’s impact in the oxygen and helium markets.
Commissioner Margrethe Vestager, responsible for competition policy, explained, “Gases – like oxygen and helium – are crucial inputs for a large variety of products we use every day. Manufacturers need to buy these gases from a small number of suppliers. We will carefully assess whether the proposed merger between Praxair and Linde would lead to higher prices or less choice for European consumers and businesses.”
The Commission is concerned that the merger would reduce the number of major players active worldwide and in Europe for the supply of carbon dioxide (CO2), oxygen and helium – and many other gases – to just three. “Other players in the market only have regional, national or local presence and lack the technical and financial capabilities to compete on an equal footing,” the Commission explained in a press release.
“Such challenges are to be expected in a deal of this ($70bn) magnitude. This is also consistent with mega mergers in other sectors in recent years, not least the wider chemicals and refining business”
With the delicate divestment process ongoing and consultants in lockdown over what can or cannot be discussed, something of a rumour mill exists in the business community.
So what are the rumours?
Companies so far linked with picking up divested assets include Air Liquide (itself the $13bn purchaser of Airgas in 2015/16), Air Products, Messer Group (in partnership with CVC Capital Partners), Matheson (TNSC), and private equity firms such as KKR & Co. and Carlyle Group.
How credible these associations are, and to what extent they will swoop for different assets around the world, will all be revealed in due course.
3. Efficiencies in focus
As of recent weeks, we know that Linde and Praxair both enjoyed solid 2017’s respectively, with Linde in particular reflecting upon increases in both group revenue and group operating profit.
Linde is making more rapid progress with its LIFT efficiency programme than planned – an interesting point in itself as it nears a merger with the company long known to be the most profitable in recent years (Praxair).
“We’ve had a very decent year. We met our targets in full and achieved increases in revenue and earnings after adjusting for exchange rate effects,” commented CEO Professor Dr. Aldo Belloni. “Our proposed merger with Praxair remains on schedule.”
The union is expected to create considerable value, resulting in approximately $1.2bn (€1.1bn) in annual synergies, driven by scale benefits, cost savings and efficiency improvements. From the word go, it has been described by the two companies as bringing together Linde’s long-held leadership in technology with Praxair’s efficient operating model and productivity.
As the transaction moves ever nearer, Linde is already becoming a leaner organisation.
4. AGM season
Finally, we also know that in heading for Q2 we’re moving into AGM season. With AGM’s come facts, figures and questions – and with questions, come answers.
In disclosing its full year (2017) financials a fortnight ago, Linde confirmed that merger approvals have already been received for Algeria, Ecuador, Kenya, Pakistan, Paraguay, the Philippines, Russia, South Africa, Turkey and Ukraine.
“Linde and Praxair continue to assume that they will be able to complete the merger in the second half of 2018 following the timely receipt of all the required approvals,” it added.
To an extent, this is in the hands of third parties such as the FTC and EC. So whilst we may not be able to expect too many concrete conclusions any time soon, with AGM season getting underway we can perhaps expect the trickle effect of a few more details to be teased out in the coming weeks.