Last updated: July 2, 2012 5:59 pm

Linde / Lincare

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Deal opens the door to a promising growth market but at a price

Marriage between cousins is a questionable practice. And judging by the 3 per cent fall in Linde’s share price on Monday, it is not just sociologists who think so. A century ago, Florida-based respiratory therapy group Lincare was known as Linde Homecare Medical Systems, founded by the same engineering professor, Carl von Linde, who established the eponymous German industrial gases group. Now, after a long spell under the Union Carbide umbrella and two decades of going it alone, Lincare is being acquired by Linde in a friendly $4.6bn deal.

The union has strategic logic. Linde, which drew the lion’s share of its €14bn sales from manufacturing customers last year, wants to increase its health sector exposure. It recently added Air Products’ European homecare activities for €600m. The Lincare deal will more than double revenues in this area to around €2.8bn and give it a lead position in the US market. Ageing populations and the health authorities’ desire to encourage homecare are long-term growth drivers. The “average oxygen patient” is 75 years old and, by 2030, there could be 72m Americans aged 65-plus, compared with 25m in 1980.

The issue is price. The $41.50 a share offer compares with Lincare’s undisturbed price in late June of $25. The exit multiple on forecast 2012 earnings is 18, and the enterprise value to earnings before interest, tax, depreciation and amortisation multiple is over 9. While the deal should be accretive, synergies will be a modest €40m. Moreover, 60 per cent of Lincare’s revenues come from US Medicare/Medicaid schemes, where competitive bidding is pushing down rates. Linde argues that Lincare has a record of bouncing back from such pressures. But performance has not been smooth, and ebitda margins have faded. Investors should be slow to chuck confetti at this marriage.

Email the Lex team in confidence at lex@ft.com

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