Deals

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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

Mergers of equals always involve tough compromises and rarely end up equal. Look at Praxair Inc. The U.S. chemicals giant is straining its sinews to persuade German peer Linde AG to do a cross-border tie-up without it looking like an American takeover of a Teutonic titan.

Praxair has made a fresh approach and Linde is weighing the proposal, the companies said this week. The move comes after previous talks collapsed in September amid disagreements over governance. Praxair has tried to address those concerns with some big concessions. It proposes a dual headquarters for the new entity so the German company's base is maintained, and would keep more senior roles in the country, Bloomberg News reported.

The enlarged group would be run by Praxair CEO Steve Angel, with Linde Chairman Wolfgang Reitzle retaining his position. That conveniently solves the problem of finding a replacement for Linde CEO Wolfgang Buechele, who's due to step down next year.

Are these concessions enough to bag a deal? Investors hope so. Linde shares shot up to as much as 162.75 euros on Wednesday, a 12-month high. The stock was trading at about 140 euros in August just before the first set of talks emerged. Since then the Stoxx 600 chemicals index has barely risen, and Praxair's shares are little changed too.

Looking Out For Linde
The German chemicals group ticked up after Praxair deal talks ended in a hue and cry over governance
Source: Bloomberg

The excitement partly comes down to the likely generous financial terms. These would give Praxair and Linde shareholders 50 percent ownership of the combined entity, Bloomberg News reported. That bakes in a small premium for Linde shareholders, whose contribution would be just 45 percent based on the pair's August trading values, or 47 percent based on their recent averages.

There's also a lot of financial potential. Analysts see yearly cost savings of about 500 million to 900 million euros from a deal. Suppose 750 million euros was achieved. Taxed at 25 percent and ascribed a 15 times multiple, these would be worth 8.4 billion euros. Even discounting for one-off costs and the time taken to achieve these benefits, Linde and Praxair shareholders could each enjoy about 3.5 billion euros of value creation under a 50:50 ownership split. That's worth nearly 20 euros per Linde share.

But right now, it's unclear whether Praxair's compromises are enough to secure agreement from the Linde board, where workers have a strong voice. The synergy potential may be undermined if regulators demand substantial disposals to wave this through. That's something they need to take very seriously: it's far from obvious that this industry can go from having four to three major players without leaving customers worse off.

Praxair's proposals make a deal more likely. But perhaps not as much as Linde's share price suggests.

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

To contact the authors of this story:
Chris Hughes in London at chughes89@bloomberg.net
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

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