By Robert Wall
Industrial-gas giants Praxair Inc. and Germany's Linde AG concluded a two-year courtship Tuesday, agreeing to join forces to create the industry's biggest player with a combined market value of $66.6 billion.
The two companies Tuesday said both boards endorsed the combination after on-again, off-again talks that foundered earlier this year before picking back up more recently.
The industrial, or "specialty," gas business is one of the critical pillars of the modern economy, though its biggest players have never been household names. They provide gas mixtures, such as helium and pure oxygen, used inall sorts of industrial applications: They cool the superconductive magnets in MRI medical scans and reduce emissions from refineries.
Key customers include oil drillers and refiners, chemical makers and hospitals. Praxair and Linde also make gases used in manufacturing and food production.
Regulators around the world still need to approve the tie-up. Linde is currently the industry's No. 2 player and Praxair, based in Danbury, Conn., is No. 3, behind industry leader Air Liquide SA of France. A Linde-Praxair combination would have about $30 billion in annual sales before divestitures.
Linde shares were trading 3.8% lower in Frankfurt after the deal was announced. Praxair shares were down about 4.5% in morning trading in New York.
The industrial-gas sector has been in flux amid declining energy prices and sluggish growth in key developed markets. Slowdowns in oil and gas activity and health-care spending, particularly inthe key U.S. market, have been a drag on performance. Companies that compete in the business have rushed to consolidate to gain scale amid those headwinds.
In May, Air Liquide completed its own big deal, buying U.S.-based Airgas Inc. for about $10 billion, and propelling the French company to the top of the industry pack. Munich-based Linde had previously wrested the No. 1 position from Air Liquide with its $14-billion takeover of the U.K.'s BOC PLC in 2006.
Linde and Praxair first discussed a merger two years ago but put those talks on ice after the German company issued profit warnings. Talks were revived this summer. But Linde's board in September called off that round over concerns about the deal's structure.
The breakdown led Linde Chief Executive Wolfgang Büchele, who backed the tie-up, to quit. He was replaced by Aldo Ernesto Belloni. The company's chief financial officer, George Denoke, also departed.
The Wall Street Journal reported in November the two sides were talking again. At the time, Praxair pledged any combined company would have a dual New York and Frankfurt listing. The two companies said Tuesday the merged company, to be called Linde, will also maintain facilities in Germany.
The deal is a corporate reunion of sorts. What is now called Praxair was once part of Linde. Founded as the German company's American arm in 1907, Linde Air Products developed so rapidly that by World War I, it was bigger than the German parent. In the early part of last century, Union Carbide bought it. It then spun the company off in 1992, naming it Praxair. Union Carbide is now part of Dow Chemical Co.
Praxair Chairman and Chief Executive Steve Angel would be CEO of the new company and based in Danbury. Linde Chairman Wolfgang Reitzle will retain that role. The new board would have equal representation from both companies.
Linde shareholders would receive 1.540 shares in the new company for each of their existing share, and Praxair shareholders would receive one share in the business for each of their shares.
The new holding company would be domiciled somewhere in the European Union, though the two companies didn't say where. Having the combined company's legal headquarters outside the U.S. could confer tax advantages. Both the U.S. and Germany have relatively high, headline corporate tax rates, so the new holding company might save on taxes if it is located elsewhere.
But it is unclear what effect that would have on overall taxes of the two firms' far-flung operations. For instance, foreign-headquartered companies have engaged in what's known as earnings stripping to lower their overall tax bill. They load up their U.S. operations with intercompany debt, deducting interest against the 35% U.S. corporate tax rate and effectively shifting U.S. profits to a lower-taxed country.The U.S. Treasury Department finished regulations this year that would sharply curb earnings stripping, but Republicans opposed them fiercely.
The incoming Trump administration could undo those rules, or the Republican Congress could repeal them. House Republicans are also proposing a revamped corporate tax system that could make the practice largely obsolete.
People close to the deal said seeking tax advantages wasn't a primary motivation to merge.
The two companies said they were working to quickly cement a definitive merger agreement. One big hurdle will be winning global regulatory approval. Analysts at Bernstein Research expect the companies may have to part ways with activities generating around $5 billion in annual sales to appease regulators.
Michael Harrison, chemicals analyst at Seaport Global Securities in Chicago, said a key focus of regulators would likely be on the so-called merchant-gas sector of the industry, where companies deliver gas by truck within a radius of a few hundred miles. Regulators will want to try to ensure there is more than one supplier of merchant gas in most areas. That will require some asset sales, Mr. Harrison said. Another possible focus: any overlap providing oxygen cylinders to health-care customers in the U.S.
--Laurence Norman in Brussels and
in Washington contributed to this article.
Write to Robert Wall at email@example.com
(END) Dow Jones Newswires
December 21, 2016 02:47 ET (07:47 GMT)
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