Desublimation happens when a gas turns directly into a solid. Shareholders in Air Liquide will have to wait some time for its $13.4 billion acquisition of Airgas to do the financial equivalent – turn an airy bid premium into concrete value creation. Strategically, the combination is attractive but the financial case is not.
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 a fancy price tag. It turned down a premium of 38 percent from U.S.-listed Air Products 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 6 percent. 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 achieves the $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 does today. The heady aroma of ambition may have overpowered simple financial sense.