August 22, 2018 / 2:01 PM / 3 months ago

Breakingviews - Gas mega-merger hubris deflated by regulators

Praxair Chief Executive Officer Steve Angel (R) poses with Linde Chief Executive Officer Aldo Belloni before a news conference in Munich, Germany June 2, 2017. REUTERS/Michaela Rehle

LONDON (Reuters Breakingviews) - The logic of an $83 billion gas mega-merger is quickly deflating. Linde needs to sell more assets than planned to pull off its tie-up with Praxair, meaning hurried disposals and fewer cost savings. Investors are already treating the deal’s benefits as a load of hot air.

The U.S. Federal Trade Commission is proving a hard sell on the benefits of a deal to create the world’s biggest industrial gas company. Munich-based Linde said on Wednesday it now expects to have to sell enough assets to tip the combined disposals of the two groups over the 3.7 billion euro revenue threshold they agreed last year.

America may not be the only roadblock. The pair still need approval from regulators in China, India and South Korea.  And the deal must be completed by October 24 under German law. The risk is that disposals are hurriedly pushed through, or that the two sides struggle to agree on which assets to sell in time. The fact Linde so far only expects to breach its revenue target, not EBITDA, suggests the assets sold so far have been less profitable ones. That raises the risk that higher-margin disposals will follow.

Walking away would be a big blow. The deal combined Praxair’s mostly industrial business, with Linde’s which supplies gases to hospitals, creating a company with more scale to negotiate with suppliers, and better able to compete with the recent merger of Air Liquide and Airgas. So far, Linde has not changed its forecast for $1.2 billion in annual cost savings.

Yet shareholders are assigning little value to the deal. The cost savings, once converted into euros, taxed and capitalised, are probably worth about 8 billion euros, of which Linde is entitled to half. Yet Linde’s share has risen by just 18 percent since the deal was announced in November 2017, underperforming Air Liquide, which has risen by 26 percent.

Having nearly two years working on the deal, the two sides are probably stuck with each other. Investors may be left with a painful reminder of the perils of overambitious dealmaking.

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