AirLiquide; Market Cap: $39.84bn (as of 20/11/15)
Airgas; Market Cap: $10.00bn (as of 20/11/15)
On November 17, the French industrial gases specialist Air Liquide announced it had reached an agreement to acquire the U.S. supplier Airgas for a total consideration of $13.4bn, including debt. The deal would create the largest industrial gases supplier. It is the biggest industrial-gases deal in the last 9 years and is expected to close within nine months.
Air Liquide is a French multinational company, the world’s second largest supplier of industrial gases and services to several industries including medical, chemical and electronic manufacturers. It can boast of a global footprint, comprising of 80 countries, where its core activities are related to oxygen, nitrogen and hydrogen.
Its momentum, with consolidated revenue up by 4.5% in 2014, is particularly driven by expansion in APAC (+11.6%), with a particular focus on emerging economies, such as China (+20%). Even if Europe still accounts for approximately half of the total revenue figure (€15.3bn), the reference market for short-medium term growth is clearly North America. In the region, Air Liquide is far from being the most prominent player, but in 2014 the market reported a 7.9% growth mainly supported by the increased oxygen and nitrogen volumes. Furthermore, Air Liquide’s Electronics business is becoming far more important, reporting a 30% improvement in revenues during the last fiscal year, which was mostly the result of realized synergies and integration with Voltaix, the semiconductor materials’ manufacturer acquired by the French company in 2013. Moreover, the company has always been at the cutting edge of innovation in the industry, filing 287 patents only in 2014 and having launched in 2011 a €12bn investment program, primarily to outsource industrial gas production and to perform strategic acquisitions.
As of Thursday 19, Air Liquide traded at 22x its LTM EPS, and its share price is up 18% on an annual basis, even after its 7% price drop after the acquisition announcement. These figures probably convinced its management to undertake a stock issuance, instead of raising a huge amount of debt that could have possibly deteriorated its credit standards.
Airgas is currently one of the largest U.S suppliers of industrial and medical gases, as well as safety products and refrigerants. The company’s distribution division supplies its customers with gases (atmosphere gases, nitrogen, oxygen, argon, etc.) delivered in packaged and bulked quantities, which are produced in the company’s gas labs. Airgas also offers hard goods, such as welding equipment, and supply chain management services.
The U.S player has reported modest growth in 2014 sales, which increased by 2% to $5.1bn. The company showed record FCF generation of $441m, which allowed it to make eleven strategic acquisitions with aggregate annual sales of $82m and to increase its Q1 2015 dividend by 15%. Airgas’ unaffected share price of c.$94 was down 18% on an annual basis, trading at a LTM EPS multiple of 19x, but still 34% higher than the $70 per share bid received by Air Products in 2011. As of November 19, the company trades at $138, close to the announced transaction price of $143 per share. The EV paid by Air Liquide of $13.4bn represents an EBITDA multiple of 14.4x, based on the adjusted EBITDA figure reported by Airgas in 2014 (c. $930m), way higher than the 8.8x multiple that Air Products would have paid on Airgas’ 2010 adjusted EBITDA (c. $660m).
Air Liquide is going to buy Airgas for $13.4bn, paying the company’s shareholders $143 per share in cash for all outstanding shares. This price implies a premium of 50.6% to Airgas’ one-month average share price prior to the announcement of the transaction and a premium of 20.3% over its 52-week high share price. The offer values Airgas at 12.8x 2016e EV/EBITDA, a multiple higher than the peer group’s average of approximately 11.5x. The deal is expected to be accretive in EPS from year one by Air Liquid’s management.
A further consideration might explain the huge premium that Air Liquide has offered for Airgas. In late 2010, the Pennsylvania based company fought off a takeover from Air Chemicals because the board of directors thought that the offer was too low. Its strategy was to enact the so-called poison pill, i.e. to exercise the right to sell new shares at a discounted price to its current shareholders to increase the cost of the acquisition. The company then said that it was willing to negotiate a deal starting from a higher price, but Air Products withdrew its offer. Considering this episode, it seems plausible that Air Liquide made a higher bid right from the start fearing that Airgas would react as it did in 2010.
Air Liquide has committed bridge financing for the transaction and is planning to refinance through a capital increase in the range of €3bn to €4bn, and a combination of U.S. dollar and Euro long-term bonds. The firm’s objective is to maintain its S&P’s A–/A rating. The transaction was approved by the Boards of Directors of both companies but its success is subject to the approval of Airgas shareholders and of the relevant antitrust authorities.
The global industrial gas market is dominated by three major chemical companies: Air Liquide, Linde and Praxair which account for c.75% of the industry in terms of sales. 2015 has been affected by a fall in commodity prices, and more particularly in oil and gas prices. Demand for drilling equipment and petrochemical plants has decreased consequently. The industry is trying to reshape to fight this trend.
Air Liquide planned to grow externally and to develop its activity in the packaged gas in the US. Competitors are intensifying their strategies as well: the German Lindeis developing its healthcare activity especially in China; Praxair, last September, announced it will acquire Yara, a supplier of carbon dioxide in Europe.
Despite the high price offered, Air Liquid could deeply benefit from the acquisition of Airgas. Air Liquide can now fulfil its ambition to become the leader of the industrial gas market instead of Linde, with $17.8bn of pro-forma sales (+30%). But more than just a leadership, it was a complementary business that the petrochemical company was looking for.
Geographical complementarity first, this transaction will allow Air Liquid to reshape its international presence. Air Liquide’s investments in emerging countries seem to have been delayed by the economic downturn in Asia and South America. The gas company wants to strengthen its presence in the US, which is recovering and therefore seems attractive. Its turnover will rise from 24% to 42%, originating from Americas. This would reduce Air Liquide’s exposure to country risk with a more diversified presence.
In September 2015, Airgas announced the spin-off of its technology-material business. The remaining activity, Airgas’s distribution of packaged gases, generates strong and growing cash flows. Combined with Air Liquide’s gas production, the activity of the new entity will benefit from economies of scale due to this horizontal integration and from the new distribution network in the US.
Finally, Air Liquide expects to benefit from Airgas’s savoir-faire in innovation. The industrial internet, led by General Electrics that started developing management data applications, could create long term productivity gains. Airgas’ powerful e-business platform could boost Air Liquide’s results.
Overall, this transaction is expected to generate $300m synergies arising in 2019 from cost reductions with a more efficient distribution network and sales improvements from Airgas’s customer basis.
Investors weren’t pleased by the news of the acquisition, and on the day of the announcement the share price of Air Liquide dropped by 7%. They fear that Air Liquide might be overpaying for Airgas, and they are concerned about the increased exposure to the US manufacturing industry that Air Liquide will obtain after the transaction. Moreover, the company will considerably increase its exposure to debt and it may fail to maintain an S&P 500 A-/A rating despite its confidence.
Barclays Bank Plc and BNP Paribas are acting as financial advisors to Air Liquide and Goldman Sachs and Bank of America Merrill Lynch are acting as financial advisors to Airgas.