Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

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.

This Praxair-Linde merger wasn't worth the wait. 

The two industrial-gas suppliers on Tuesday announced they've settled on overarching terms for a combination that will create a sector giant with about $30 billion in revenue. This meeting of the minds comes about three months after previous deal discussions broke down because of Munich-based Linde AG's concerns about the impact on jobs and operations at its headquarters. Praxair Inc. investors have little reason to give the company thanks for its negotiating efforts: Praxair has given away plenty to persuade Linde to enter into a deal, without compensating itself for the substantial regulatory and integration risks it's taken on.

Come Together, Right Now
Linde has outperformed Praxair over the past five years, but its recent slump put it on the receiving end of its U.S. rival's advances
Source: Bloomberg

Linde holders are being offered close to a 50 percent share in a newly created combined company, when around 45 percent would have been more appropriate based on the duo’s market values in August. That mini-premium is worth about $3.4 billion (3.2 billion euros) based on undisturbed prices, or over 17 euros a Linde share. That's before accounting for the $1 billion of annual synergies that the companies are targeting. If achieved, those financial benefits could be worth about $9.8 billion (9.5 billion euros) once taxed, generously capitalized and discounted back for the time it takes to achieve them. These would be worth 25 euros a share to Linde and $17 to each Praxair holder.

The agreements on the less-tangible matters of corporate governance look like a fudge. Praxair initially wanted to base the holding company for the merged entity in Europe, with the operational center in the U.S. Now, the combined company will be based in a "neutral member state" of the European Economic Area, but corporate functions will be split between Munich and Praxair's home base of Danbury, Connecticut. Praxair gave away half the combined company's board seats to Linde -- despite the fact that it's the one paying a premium. It also sacrificed its name; Praxair will disappear and Linde will persist.

Putting Praxair CEO Steve Angel in charge is but a small consolation prize considering Linde has faced a leadership gap since the deal talks fizzled over the summer and only just brought back a retired veteran as CEO. Linde's Supervisory Board Chairman Wolfgang Reitzle will continue in that role at the merged company.

Gas Giants
Praxair and Linde's combined revenue would top that of Air Liquide, which earlier this year acquired Air Gas for $13.4 billion including debt
Source: Bloomberg

It was a long journey, but getting to this point is of course only the beginning. Praxair will need to convince regulators to bless the merger, despite the fact that there are really only four major industrial gas companies following Air Liquide SA's purchase of U.S. rival Airgas Inc. for about $13 billion earlier this year. At best, the companies are likely looking at large divestitures, which could eat into cost-saving opportunities. The integration of the two companies' operations and cultures will then require herculean effort. It's clear from Linde's profitability discount to Praxair that the German company could use some operational fine-tuning, but restructuring in Europe is always tricky.

Mind the Gap
While Linde generates much more revenue than Praxair, the U.S. company is significantly more profitable
Source: Bloomberg
Data is trailing 12-month.

There's a blueprint for success here in General Electric Co.'s $10 billion purchase of energy assets last year from France-based Alstom SA. GE was able to upgrade its synergy and earning accretion estimates for that deal, but CEO Jeff Immelt has said getting to that point took "the entire company" -- one that he controls, mind you. Praxair CEO Angel can't say the same. Conceding the chairman post and board spots to Linde will make it harder to effect change in the combined company.      

Shares of Praxair dropped 4 percent on Tuesday's news, leaving the U.S. chemical producer trading within a dollar of where it was before news of the Linde talks surfaced back in August. Linde, meanwhile, has gained about 13 percent since this summer.  

Praxair shareholders are right to feel they've gotten the short end of stick.

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

To contact the authors of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net