Deals

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

Fresh from negotiating one ugly mega-merger, is Wolfgang Reitzle angling for another?

Reitzle became chairman of German industrial gas company Linde in May, having served there as CEO for more than a decade until 2014. During a break from Linde he helped put together the merger of Holcim and Lafarge, a $35 billion cement combination whose signature achievement so far has been to destroy shareholder value. Now, Bloomberg News reports that Linde has held talks to combine with U.S. rival Praxair.

Unlike LafargeHolcim, an industrial gas merger would probably make investors happy, and create plenty of synergies. No wonder the shares surged 7.5 percent on Tuesday. But let's be clear, the main motivation for combining the two companies would be to reinforce pricing power in an already highly consolidated industry. So this is potentially a very bad deal for customers.

Following Air Liquide's $13.2 billion takeover of U.S. rival Airgas, there are just four major industrial gas companies worth talking about: Praxair, Linde, Air Liquide and Air Products. Together, they have more than 75 percent market share, according to Jeremy Redenius at Bernstein. Praxair-Linde would have 40 percent.

Market Power
The top four control more than 75 percent of the industrial gases market
Source: Bernstein Research
nb the data is from 2014. We combined Air Liquide and Airgas' market share but Air Liquide is having to divest some U.S. assets to get the takeover approved.

Industrial gas companies are known for being able to dictate pricing, which for years made them a darling among investors seeking steady returns. To justify the large cost of plant investment, they make customers sign long-term "take or pay" contracts, to guarantee a decent profit.

Yet with the economy in a funk and overcapacity rife, growth is getting harder to come by. That's a problem for Wolfgang Buechele, who became Linde CEO in 2014. Under his predecessor, Linde shares quadrupled. Under Buechele, they've sagged. The comparison isn't entirely fair of course: the new man was bequeathed some overly ambitious targets. Reitzle quit while the going was good and it fell to Buechele to cut medium-term profit guidance.

Diverging Fortunes
Praxair shares have outperformed Linde, which cut mid-term profit targets in December
Source: Bloomberg

Linde's revenue is expected to sink this year and barely exceed the 2015 total in 2017. In contrast, Air Liquide targets 6-8 percent of compound annual growth over four years, helped in part by Airgas. A merger would be a quick way to get Linde's top line moving again.

For Praxair, this could be an opportune moment for a deal if the considerable antitrust worries could be eased. The two companies' market values are similar, even though Linde's revenues are almost twice as large. Still, the German company's recent difficulties shouldn't obscure its pedigree. A merger of equals would sell its shareholders short.

In the Balance
Linde's shares have taken a beating lately but it would be hard to frame this as a merger of equals
Source: Bloomberg

And while the strong U.S. dollar gives Praxair a handy deal currency, the competition concerns make a full-blown takeover unattractive. It also has $9.4 billion of net debt, about 2.7 times Ebitda. That seems plenty, though selling Linde's lucrative U.S. medical gas business would reduce leverage.

With his predecessor peering over his shoulder, Buechele needs a way to get out of a tight spot. But dealmaking is a dangerous game. Asset swaps, including with Praxair, might be a safer option. Wasting months on a blocked takeover won't win him any friends.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net