Linde-Praxair Merger: What is it and How Does it Impact Global Industrial Gases Market?

The Linde-Praxair merger has been sending shockwaves through the global industrial gases market is a moot point. When TechSci had first reported on the issue a few months back, the broader details of the merger hadn’t yet reached corporate circles, not to mention that the merger still had several question marks on its head, given the antitrust consequences and difference in boardroom cultures in the German Linde Group and American Praxair. However, TechSci has once again called on its experts to take a relook at the situation emerging in the global industrial gases market.

The Current Linde-Praxair Merger Situation

As of today, Linde has said in an announcement that the 10-week acceptance period for its proposed $74 billion merger with Praxair has started and would run through Oct. 24. Linde AG shareholders may tender their shares under the terms of the exchange offer launched by the new holding company Linde plc. Linde shareholders will receive 1.54 shares in the new holding company for each tendered Linde AG share, as per the terms agreed upon with Praxair and approved by the German authorities.

 In order for the deal to have gone ahead, it first needed to be approved by a majority of Praxair shareholders. Their Linde counterparts, however, elected not to vote on the merger, and instead were required to tender 75% of the company’s shares before the completion of the Linde-Praxair deal. As of today, the entire process is near completion.

Praxair has scheduled a special meeting, to be held on 27^th September this year, of company shareholders to seek the adoption of the Business Combination Agreement and the approval of the Praxair merger. American regulators have already reviewed all pertinent files and given the merger the go ahead from their side.

 This comes on the back of some unexpectedly favourable circumstances vis a vis Linde. European countries such as Germany are, in many ways, unique in the global industrial gases market as they follow extremely tough rules whereby companies must cater to their powerful trade unions before making such decisions.

 All German companies above a certain size must have equal representation of labour and capital interests among the board of directors. For Linde, in case of a tie, the Chairman on the board would cast the decisive vote. As it turns out, the labour unions finally caved and the merger was voted into existence without the eventuality of a decisive vote, a move that is set to create a new global industrial gases market giant.

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Competition in the Global Industrial Gases Market

TechSci Research report “Global Industrial Gases Market, Competition Forecast & Opportunities, 2012-2022” delves heavily into the various moves made by major players in the global industrial gases market. Experts at TechSci Research familiar with the topic have shared some interesting insights into how the global industrial gases market is positioned at this point.

As per the TechSci Research report, global industrial gases market is forecast to grow from $ 75.51 billion in 2016 to $ 106.26 billion by 2022, exhibiting a CAGR of around 6%, in value terms, during 2017-2022. TechSci experts suggest that rising demand from chemical & petrochemical, metal fabrication & production, automobile, healthcare & pharmaceuticals and food & beverage industries are some of the major reasons for the growth witnessed in global industrial gases market.

 Experts conclusively argue that the French company Air Liquide SA is, by all accounts, the leading company in the global industrial gases market by quite a margin. The Paris based company is the global leader in the gases market and employs over 68 thousand people worldwide. The merged entity, however, is set to take the fight to Air Liquide and promises some interesting times ahead in the global industrial gases market.

 While Air Liquide is involved in the manufacturing of gases that are used in products such as healthcare items, electronic chips, foods and chemicals, the bulk of its business is still derived from its position in the global industrial gases market. Therefore, stiff competition from Linde-Praxair is expected to definitively undercut Air Liquide by streamlining their merged businesses and optimizing their efficiencies.

TechSci Research experts have predicted that the Linde-Praxair merger would come off the backs of a massive global disinvestment drive, with a strong possibility of the company selling off certain assets, especially in the Asia-Pacific (APAC) region. However, the merged entity is still expected to emerge as the leader in global industrial gases market by a reasonably comfortable margin.

 

The Numbers: How Does Linde-Praxair Merger Stack Up to Global Industrial Gases Market

As per their 2016 Annual Report, Air Liquide enjoyed revenues worth over 18 billion Euros in 2016, up from around 16.3 billion Euros the previous year. The global industrial gases market leader also holds assets worth over 44 billion Euros as of 31 December 2016.  This is a major step up from the previous year when it held just under 29 billion Euros worth of assets. Equity and liabilities are accounted for as well, with upwards of 44 billion Euros in 2016 and just under 29 billion Euros in 2015.

Linde, one of the largest players singly, in the global industrial gases market, enjoyed a revenue of just under 17 billion Euros in 2016, down 2.3% from the previous year when it was over 17.3 billion Euros. Out of this, the gases division forms the lifeblood of the company, with just under 15 billion Euros worth of revenue coming from this division in 2016, down from over 15.1 billion Euros in 2015. The global industrial gases market is one part of the overall gases industry.

Praxair, another global industrial gases market leader generated revenues worth around $10.5 billion in 2016. This was lower than 2015 when they generated around $10.8 billion which, additionally, is lower than their 2014 revenue generation of over $12 billion. Net income too, has declined, from just under $1.7 billion in 2014, to just under $1.55 billion the next year to exactly $1.5 billion in 2016.

Obviously, given the divestment drive set to take place, a simple back of the envelope calculation involving Linde and Praxair is impossible, but it is easy to see how the Linde-Praxair merger will make the entity the leading player in global industrial market.

Different Trends in the Global Industrial Gases Market

Perhaps the most important trend in the market, as highlighted by experts at TechSci Research, is the trend of merger and acquisition activities taking place in the global industrial gases market. in fact, the TechSci Research report “Global Industrial Gases Market, Competition Forecast & Opportunities, 2012-2022” specifically predicted that market consolidation of the sort was taking place at that time and is currently occurring as well.

In fact, it was another merger that set the ball rolling on the Linde-Praxair agreement that we see today; this was the merger of Air Liquide with the American company Airgas, Inc. The Airgas-Air Liquide merger is actually what reignited the wave of consolidations occurring in the global industrial gases market. Air Liquide acquired Airgas in May 2016 for $143 a share in a deal worth more than $10 billion, double of what Air Products & Chemicals offered for Airgas not half a decade previously.

Even though, Airgas was a leading distributor of industrial, medical and specialty gases in the US, it helped free up operations for Air Liquide in the global industrial gases market as well, due to the fact that it was having to concentrate less on the industries where Airgas specialized and where Air Liquide and Airgas were rivals.

 The ideas and the implementation behind the merger was simple. The two gas producers fit together too neatly to not merge. Air Liquide mainly served big customers in the Americas who filled huge tanks with bulk purchases. Airgas, on the other hand, sold bottled products to smaller customers. The very welcome overlap and also the targeting of North America, especially the US, was extremely helpful to both companies.

The merger so far, has been a massive success. Revenue increased well over 38% on the back of a vibrant Gas & Services business division (in which Airgas was incorporated), which grew 42.2% after the merger. While some business units such as Engineering & Construction did not do so well, Gas & Services was responsible for 97.5% of sales that year. In total, the group revenue increased 1.5% on comparable basis, most importantly as a result of the Gas & Service (and Airgas) unit improvement.

Gas & Services business unit was able to improve sales in every geographic area, especially in the U.S. (+160% overall, +3.7% comparable). In spite of the volatility in the global market given oil prices and currency fluctuations, the merged entity has managed to do remarkably well. Currency impact on Q1 revenue was +2.4%, natural gas price fluctuation impact was +2.2% and electricity price impact was +0.5% for the group. This implies an organic growth of 2.66% for the Gas & Services division, and 1.42% for the total group after just one quarter.

 Conclusion: Linde-Praxair and its Impact on the Global Industrial Gases Market

It stands to reason that the Linde-Praxair deal was done with at least some deference towards Airgas-Air Liquide and what it helped the two companies achieve. This one is supposed to have been more difficult given that both companies were actually rivals for market size and market share, rather than just two players operating independently in the global industrial gases market.

One has to remember that a major aspect of resource allocation for these two countries was to compete with each other to supply a larger portion of the global industrial gases market. however, now that this is no longer the case, the companies can get together to target the other players in the market on diminished input pricing. Diminishing input pricing will lead to lower cost price which will lead to higher demand and a larger market share, in theory at least.

As mentioned previously, the global industrial gases market is set to grow at a CAGR of over 6% over the next five years, almost twice of what the IMF expects the global market to grow at, thus denoting a very positive outlook for the industry. Several key indicators, such as automobile and packaged food production are on the rise, and with the volatility in energy and currency markets looking set to abate, the global industrial gases, market may even rise at a faster than expected rate.

While only time can tell how the deal ends up looking, give that hindsight is 20/20, prima facie TechSci Research experts believe that the merger between Linde and Praxair could end up looking like a coup, given the capacities and capabilities of the two individual entities. However, this merger, while it may draw inspiration from Air Liquide-Airgas, is not one between two complementary companies but two rivals. A lot of future success leverages upon the companies ‘abilities to divest smartly and ensure proper coordination and synchronicity to dominate global industrial gases market.

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