A worker prepares empty canisters ahead of filling inside the Linde AG compressed gas plant in Marl, Germany. (Photographer: Jasper Juinen/Bloomberg)

This $86 Billion Gas Deal Is Deflating Fast

(Bloomberg Opinion) -- Getting two management teams to agree on a deal to create the world’s largest industrial gases group was hard enough. Finalizing the combination of Praxair Inc. and Linde AG is proving harder still. The former, in particular, should be asking if the benefits really are worth it.

The possibility of a transaction surfaced in August 2016. An agreement to create the $86 billion giant was inked in June 2017 after on-off talks, a row with Linde’s unions, and the departure of the German company’s CEO and CFO. To win over its partner, Praxair ended up agreeing to pay a small premium, to call the combined company Linde, and retain Linde’s chairman. Praxair boss Steve Angel was nominated to be CEO.

Since then, trustbusters have rightly made aggressive demands for assets to be sold to rivals given the deal would shrink the market from four to three large players. The combined revenue of the businesses required to be sold now exceeds 3.7 billion euros ($4.3 billion) — the threshold that both Linde and Praxair agreed should give them the right to rethink the whole affair.

It isn’t clear what additional disposals are needed. Assuming the ceiling is a little flexible, a deal might still make sense if divested revenue was to exceed, say, 4 billion euros. But the more the combined business shrinks, the more the financial benefits of the deal — put at $900 million — are placed in jeopardy.

A renegotiation of the terms is probably a non-starter given how hard-fought the original deal was. It would require new shareholder votes and documentation, pushing completion into to the middle of next year. It could potentially put the existing disposal agreements at risk, too.

This $86 Billion Gas Deal Is Deflating Fast

There has been no significant divergence in the two sides’ financial performance over the last two years — Linde is today worth about 47 percent of the combined companies’ market values, as it was when the terms of the all-stock transaction were agreed. The German stock trades well below the roughly 240 euros that bullish analysts at Baader and UBS reckon it would be worth if the merger went ahead.

It’s this deal or no deal. Praxair seems to have less to lose from walking away. It has a long-term management team and still trades at a higher valuation than its German partner.

Aldo Belloni was installed as Linde’s interim CEO amid a governance crisis during the merger talks. Chairman Wolfgang Reitzle had better have a strong successor up his sleeve. If Linde has to revert to a standalone strategy, a permanent replacement should take a hard look at the work done in preparation for the Praxair deal and ask how much of the planned efficiency gains could be achieved regardless.

Those Linde shares that have been tendered to the transaction trade at a 10 percent premium to those that haven’t. That implies some small hope persists among investors that a tie-up will get done — and disappointment lurks if it dies.

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

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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