Saturday 29 April 2017

Share Watch: Gas giant to benefit from merger and new US policy

John Lynch

This column loves products that are indispensable; it also helps the share price. The companies behind such products, while not without risk, have a competitive edge that investors are usually willing to die for. Industrial gasses are a case in point.

Without these gases the global food industry would come to a halt, hospitals and medical institutions would have to close, and industry would have to find new ways of cutting, freezing, preserving, processing, smelting or incinerating.

Some time back when analysing the potential for the German industrial gasses giant Linde AG, we focused on the fact that the global market for gasses is dominated by four large companies: Air Liquide of France, Praxair, Air Gas of the US and Linde.

However, even a business so consolidated doesn't remain static for long. In the past year, Air Liquide acquired Air Gas, and last month Praxair opened new discussions to merge with Linde. Though briefly derailed by worker resistance and internal politics at Linde, talks are back under way, leading to the hoped-for largest supplier of industrial gas in the world with a 40pc market share. The Air Liquide-Air Gas combination has some 28pc of the market.

While Praxair is the largest operator in North and South America, it is not in a good place right now (challenging my theory that industrial gases are riskless). It has a problem expanding sales. At $10.8bn (€10.09bn) last year, turnover hit a five-year low. In contrast, Linde has lifted sales in the same period from €13bn to €18bn. Praxair's operating profits and earnings are also labouring.

The US company (called Praxair since the late 1980s) is headquartered in Connecticut, where it controls an empire employing some 26,000 people, with over one third in the US. It also has a listing on the New York stock exchange.

Linde has 63,000 employees in 100 countries.

The deal would bring together two large global concerns but it could face considerable regulatory examination, given the overlaps in the US and Europe. Linde is strong in Europe with sales of €9bn, only 17pc of Praxair business is in Europe. On the other hand Praxair's main market is the US with sales of $5.8bn (€5.4bn), closely followed by Linde with €4.5bn. Both companies overlap in Asia.

However, the deal would help reduce over-capacity and ease cost pressures. The merger plans cost savings in excess of $1bn (€934m) annually and the combined entity would have the Linde name and be quoted in both New York and Frankfurt.

In the event of a merger, it is likely that Linde's engineering business, which includes forklifts and the building of plants for petrochemicals, refineries and fertilisers, will be spun-off. This division has sales of €2.6bn, half from Europe and a quarter from the US.

Like Linde, Praxair produces, sells and distributes gases including oxygen, nitrogen, argon and processed gasses like carbon dioxide, helium, hydrogen and acetylene. It manufactures and distributes its products through a network of production plants, pipeline complexes, distribution centres, and it also delivers by vehicles.

Manufacturing contributes one quarter of Praxair's total sales, followed by metals and energy. Lack of demand from US metals and manufacturing has impacted on sales due to cheaper imports. If manufacturing is assisted by Donald Trump's policy of 'America First', Praxair could be a significant beneficiary.

An additional problem for Praxair has been the volatility of its shares. In early 2012, they traded at $105 and a year later peaked at $135. Since then, they have weakened quite a lot, falling to $95 early last year before recovering to $118 (€110) at year-end. The company sales face dollar headwinds and falling demand.

To counteract these problems, Praxair has increased prices and driven productivity. Also, capital expenditure is tightly controlled. However, Praxair leads the industry with superior return on capital. Investors were pleased with the dividend increase, for 23 consecutive years, which is a quality I greatly admire; a share worth watching.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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