This is undoubtedly a big day, a big month and a big year for the global gases business. With the merger of Praxair, Inc. and Linde AG we witness the crowning of a new leader in the field, the single biggest player in the industrial gases business.
Prior to Air Liquide’s $13bn acquisition of Airgas in 2015/16, gasworld had questioned whether there was scope for ‘one more big deal’ in this business. Upon its completion, I was understandably unsure that we would see anything of that scale again for some time.
But here we are, reflecting on a seismic shake up of the industrial gas landscape for the second time in as many years. Even post-divestments, Linde plc will be comfortably the biggest player in this business globally.
As the dust settles on this defining deal over the coming days, weeks and months, the inevitable question that follows is, what next?
The desire to grow, organically or otherwise, will still exist. The drive to maintain shareholder value growth doesn’t dissipate either. So, what next for the global industrial gases business?
First and foremost, it is almost universally accepted that a trail of more M&A will ensue post-merger.
I’ve heard a comparison recently to the construction materials market of the early 2000s. The cement market back then was largely dominated by large international manufacturers that depended on local ready-mix customers for market penetration. The ready-mix market was highly fragmented and managed on a local basis, with cement companies depending on local ready-mix companies to win business to pull through cement sales. The cement business also looked a lot like the gas production market, with both seeking to maximise production 24/7 as the capacity essentially expires with every passing second.
To better control the sale of cement, the large cement companies bought up local ready-mix companies at a very high pace in the 1990s and 2000s and, once a meaningful local market presence had been established, they then merged to further drive efficiency on a global basis.
In that regard, it was argued, ‘the cement playbook sounds a lot like the current gas market’.
As I understand it, though the industrial gases business is a consolidated industry, scale in local markets (ASU by ASU) is the key to profitability, which is why this merger of Praxair and Linde and its ramifications – including the asset carve-up – is significant.
And a similar playground of SME opportunities and mergers and acquisitions (M&A) activity could be about to unfold in the gases industry.
“I think we will see the ‘smaller’ players scrambling to pick up the pieces that fall out of Air Liqudie-Airgas and Linde-Praxair,” said Wayne Twardokus, Director at League Park Advisors. “Whenever big deals are completed and the companies consolidate operations, meaningful opportunities arise. Common examples could include customers looking for back-up suppliers, customer service/needs temporarily falling through the cracks, or re-qualification requirements as plants are consolidated.”
Our own CEO and Publisher at gasworld, John Raquet, had also suggested that, “The big merger of two companies presents opportunities for SME companies, as the big merger parties need to take time to integrate and that usually takes longer than 12 months. So the SMEs have the opportunity to review their tragedies and openings.”
Whatever does or doesn’t happen on a smaller scale, the upshot is a redefining of the industrial gas landscape ahead, with a new leader established, emboldened Tier One players (think TNSC in Europe and Messer Industries in the Americas), and a very different look to the industry we have recognised for the last few years.
Messer Industries, for example, will become a strong player in the industry with potentially #2-3 leadership positions in its core regional markets.
Organic growth prospects
There is an argument to say the industry now refocuses on what it does best – innovating and adding value to end-users, society and shareholders alike. And of course, driving organic growth as a result.
The rationale for the merger of Praxair and Linde was to establish a true global leader, to leverage their respective strengths, and the abundant opportunities in synergy and efficiencies. It was clearly also to maintain that all important growth in shareholder value. “The merger should better position them to generate earnings growth through optimisation of the combined businesses,” Twardokus summarised.
All of which leads to the assumption that meaningful organic growth may be increasingly harder to come by in the years ahead.
There is an element of truth to this, despite the rather ironic fact that we are seeing a positive return to organic growth across the industry which is expected to continue through 2018/19, barring any major economic correction or event.
Europe and North America are considered more mature markets where overall percent growth will be harder to maintain. Both are the core markets for Praxair and Linde. The Asia-Pacific region, however, will likely continue as a hotspot for regional growth with various emerging economies only furthering their appetite for industrial gases. The same could be said of the Middle East region. For many, it is these geographies that the next big wave of growth will derive from.
On an applications level, energy and electronics seem to be among the markets at the forefront of future growth.
A door left ajar?
Finally, what next for Air Products, the only Tier One player not to have a role in any of this mega-merger and its asset divestments?
The company has been laser-focused on its own performance in recent years, and to great effect. Under the stewardship of Chairman, President and CEO Seifi Ghasemi (pictured), Air Products has delivered quarter after quarter of improvement and increasing shareholder value, and has successfully executed against its Five-Point Plan over the past four years. This plan has seen Air Products focus on its industrial gas business, decentralise the company, change the culture, control capital and costs, and align its rewards system.
The result of which is a revitalised Air Products delivering strong safety and operating performance, generating significant investable cash, and winning new growth opportunities. One of these opportunities has been in gasification technology; the company recently acquired the gasification technology of Shell and is actively taking advantage of this platform in the China/Asia-Pacific region.
Rather than seeing the company as being left behind, there’s an argument to suggest that a door has been left ajar for Air Products – and it is in prime position to burst right through it in the years ahead. With so many of the Tier Ones now committed in terms of their investments and antitrust opportunities, it could be argued that the door is now left open for Air Products to be the catalyst behind any major M&A activity in the industry in the future.
“…they have done a great job of bringing focus to their business,” said Twardokus. “I also think they are well positioned as a viable alternative in the near-term, as I believe Air Liquide-Airgas and Linde-Praxair will be holding on tighter to the purse strings. The large-scale M&A will likely bestow corporate scrutiny on capital allocations at Air Liquide-Airgas and Linde-Praxair, which could impose higher hurdle rates.”
That same door that’s ajar could also open up new opportunities in high-growth applications. Air Products is also making hay in its pursuit of promising new gasification projects and having stripped the company back to its core, is operating from a position of strength in how and where it chooses to invest.
“This is a team committed to working together, winning together and being best-in-class in everything we do,” Ghasemi said in a recent fiscal release.
Whether this new dawn in the industrial gases business is win-win for all involved, time will tell.