Airgas’s McCausland Spurns $506 Million Payday in Bid

An Air Products & Chemicals hydrogen fueling station
A compressed hydrogen pump stands at an Air Products and Chemicals Inc. hydrogen vehicle fueling station in Allentown, Pennsylvania in this file photo. Photographer: Mike Mergen/Bloomberg

Trapped on a windless patch of sea, Airgas Inc. Chief Executive Officer Peter McCausland wouldn’t give up.

Skippering the Nantucket Yacht Club’s entry in the world championships for International One-Design boats off the coast of Fishers Island, New York, he kept pushing his four crewmates. He was hoping, unsuccessfully, the wind might turn in his boat’s favor, said Burges Green, a retired schoolteacher who was aboard that summer day in 2004.

“Peter will fight as hard as he can for as long as he can,” Green said in an interview from Nantucket, Massachusetts, where McCausland also owns a motor boat he named “Pugnacious.” “Sometimes the wind shifts back and it works out OK, and sometimes it doesn’t.”

McCausland, 60, is trying to beat back a $5.5 billion hostile takeover bid for Airgas Inc., the Radnor, Pennsylvania- based distributor of industrial gases he founded and built through 400 acquisitions over 28 years. Director nominees from bidder Air Products & Chemicals Inc. are trying to unseat McCausland, the Airgas chairman, and two of the other nine board members at tomorrow’s annual meeting.

McCausland, who owns 9.2 percent of the company’s shares valued at $506 million, led the Airgas board in rejecting three escalating bids that it called “grossly inadequate” from Air Products, based in Allentown, Pennsylvania, about 60 miles (100 kilometers) north of Airgas headquarters.

‘Dangerous’ Referendum

“It’s now a referendum about McCausland, which is dangerous because he is the soul of this company,” Lionel Melka, an arbitrage investor who manages Bernheim Dreyfus & Co.’s Diva Synergy fund, including Airgas shares, said from Paris. “If I were Airgas, I would negotiate a friendly deal.”

The most recent offer of $65.50 is about 18 times estimated 2011 earnings of $3.61 a share and compares with the 15 times earnings that rival industrial-gas companies are trading at, said Louis Meyer, a New York-based analyst at Oscar Gruss & Sons Inc. who recommends buying the shares and doesn’t own either stock.

Airgas rose 22 cents to $64.85 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have gained 36 percent this year. Air Products climbed $1.43 to $80.21. The stock has fallen 1 percent this year.

Recession Cuts Sales

Airgas contends the Air Products’ bid came after the recession cut demand for industrial gases, including argon and oxygen used in welding. Airgas sales fell 11 percent to $3.86 billion in the fiscal year ended in March and profit excluding items dropped 14 percent to $2.68 a share. Airgas forecasts profit will climb to $4.20 a share by calendar year 2012.

The shares of Airgas outperformed Air Products prior to Feb. 5, when the takeover bid was announced. In five years, Airgas rose 75 percent, triple the pace of Air Products’ 25 percent gain. Over a decade, Airgas surged more than five times in value while Air Products more than doubled.

Air Products CEO John McGlade is pursuing Airgas to re-enter the packaged-gas market and become North America’s biggest industrial gases company. Air Products offered $60 cash for each Airgas share in February, raised it to $63.50 in July and again to $65.50 last week, boosting McCausland’s stake as of March 31 to $506 million, plus stock options.

McCausland said Air Products shouldn’t be allowed to push the company’s founder aside, and that his board may create a 10th director seat for him should the measure pass.

‘Uniquely Positioned’

“I am uniquely positioned to negotiate value for Airgas shareholders,” McCausland said in an interview on Sept. 10. “I don’t relish the prospect of getting tossed off the Airgas board.”

Frank Foster, an Airgas director from 1986 to 2004, said current board members tell him the company is worth more than $70 a share. The stock peaked at about $65 in June 2008.

“The board doesn’t just go along with what Peter says, they know what a good value is,” said Foster, 76, who is chairman of CIP Capital, a venture capital firm in Wayne, Pennsylvania, and a former CEO of Diamond-Bathurst Inc. “They think the value of the company is in the 70s.”

McCausland declined to endorse the figure, calling it “speculation” in the interview.

Shielding Company

Taking the cash is less important for McCausland than shielding his company and employees from outsiders who are likely to make major changes, said John Palms, an Exelon Corp. director and former president of the University of South Carolina, McCausland’s alma mater.

“This is his baby,” said Palms, 75, a friend. “This man does not like to lose. They are trying to give him a bear hug. Well, they better have a big bear.”

Mark Gulley, an analyst at Soleil Securities, said in a Sept. 7 report there is an 80 percent probability that Air Products will complete the takeover, for perhaps $68 a share.

“The party is very nearly over,” wrote Gulley, who doesn’t own shares of either company.

McCausland has four proxy advisory firms, including Institutional Investor Services, on his side in opposing an Air Products proposal to hold the next annual meeting in January, which would give Air Products nominees a chance to seize control of the board. The firms argue that it would deprive Airgas of the ability to negotiate the best price.

About 40 percent of shares eligible to vote at tomorrow’s meeting are held by arbitrage investors and other short-term shareholders, McCausland said. Half are long-term holders and the rest are index funds and other investors, he said.

Other Potential Bidders

Air Products threatens to end its pursuit of Airgas if its nominees and proxy questions aren’t all approved. That may send the shares falling to about $55, about 15 times estimated 2011 earnings per share, Meyer said.

To support the share price, Airgas may institute a share buyback and recapitalize the balance sheet, McCausland said. The company also would talk with other potential bidders, he said.

“We are going to explore all possibilities,” he said in the interview.

The vote comes as McCausland’s private life is in transition. He’s moving this week from the Philadelphia suburb of Lower Merion where he grew up to Erdenheim Farm, a 426-acre tract in nearby Whitemarsh Township that he helped preserve last year with the Natural Lands Trust and community members.

Started as Lawyer

His early career took a more circuitous route. After earning a degree from South Carolina in history, he attended a year at Temple University Law School before dropping out. During a summer in Nantucket, he met his future wife, Bonnie, and followed her to Boston, where he finished his law degree at Boston University School of Law.

As a 31-year-old corporate lawyer assessing potential acquisitions for the U.S. unit of German industrial gas company Messer Group GmbH, McCausland recommended buying Connecticut Oxygen. Messer was instead exiting the U.S. market, so McCausland founded a law practice, McCausland, Keen & Buckman, and raised $5.3 million to buy Connecticut Oxygen in 1982.

“He had always wanted to run a company and he saw this as a terrific opportunity that he really believed in,” said Foster, the former board member.

The business became the foundation of Airgas, which McCausland took public in 1987. He rolled up hundreds of smaller rivals and, in the past decade, bought units of larger rivals, including Air Products and Germany’s Linde AG, on the way becoming the largest U.S. packaged-gas distributor with 25 to 30 percent of the market.

“Peter doesn’t give up easily,” said Fritz McClure, a partner at Hinkley Allen Snyder LLP in Boston who has sailed with McCausland for two decades. “He didn’t give up easily when he was building his company and I don’t think he’ll give up easily when he is selling his company.”

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