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BREAKINGVIEWS-Air Liquide's bid for Airgas leaves value vacuum
18/11/2015 12:26 RSF
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By John Foley
LONDON, Nov 18 (Reuters Breakingviews) - Desublimation happens when a gas turns directly into a solid. Shareholders in Air Liquide(AI.EQ) will have to wait some time for its $13.4 billion acquisition of Airgas (ARG.N) to do the financial equivalent - turn an airy bid premium into concrete value creation. Strategically, the combination is attractive but the financial case isnot.
The two gas producers fit together neatly. Air Liquide, based in France, serves mainly big customers in the Americas who fill huge tanks with bulk purchases. Airgas sells bottled products to smaller customers. The buyer will broaden its geographical spread and take top position by sales in North America. There shouldn't be much national antitrust concern, since gas producers typically supply only over small areas.
The catch is that Airgas is a handsome prize and comes with afancy price tag. It turned down a premium of 38 percent from U.S.-listed Air Products (APD.N) five years ago - rightly, as the doubling of the Airgas share price went on to show. But that back story has seeped into the size of the French group's Nov. 17 offer. It's 52 percent above the target's closing price on Nov. 12, the day before the stock started to climb.
At that price, the post-tax return on investment Air Liquide's shareholders can expect to get five years from now would be just 6percent. That assumes Airgas' consensus forecast sales of $5.4 billion in 2016 grow by the 5 percent per-year rate it achieved over the past five years. It also assumes Air Liquide preserves Airgas' current 12 percent operating margin, and achievesthe $300 million of stated annual synergies.
To create value - by exceeding Airgas' 7.8 percent cost of capital as estimated by Morningstar - those stated synergies would have to double in size.
Is that realistic? It will be easier to achieve if cyclical U.S. industrial and manufacturing markets improve. Success may come if Airgas' online sales strength helps the enlarged business. Even then, the enlarged Air Liquide itself will for years earn a lower return on capital than it doestoday. The heady aroma of ambition may have overpowered simple financial sense.
CONTEXT NEWS
- France's Air Liquide is to buy U.S. rival Airgas for $13.4 billion including debt, the companies said on Nov. 17.
- The all-cash offer represents a 51 percent premium to the one-month average price of Airgas' shares before the announcement and a 20 percent premium to Airgas' 52-week highest closing price. It is pitched at $143 per Airgas share.
- The companies said they expected the acquisition to generate more than $300 million of annual pre-tax synergies, a "majority" within two to three years, and that the merged group would aim to have a double-digit return on capital employed within six years.
- Airgas sharesclosed at $137.35 per share on Nov. 17, 29 percent above the previous day's close.
- Air Liquide shares were 4.85 percent lower by 0915 GMT on Nov. 18 against the previous day's closing price. They traded at 117.6 euros.
