Staff at the press counter of  Linde AG prior to the annual report press conference in Frankfurt, Germany Thursday March 27, 2003. Linde AG, Germany's largest maker of forklifts and industrial gases, will cut more jobs at its forklift business and separate its refrigeration unit to accelerate cost cuts. Photographer: Wolfgang von Brauchitsch/Bloomberg-News
© Bloomberg

Air may be free, but there is money in its constituents. Selling industrial gases such as nitrogen and oxygen has been a steady business for companies such as Praxair of the US. Perhaps too steady. Reports on Tuesday that Praxair is considering sucking up one of its rivals, Linde of Germany, boosted the latter’s shares by 9 per cent. The industrial logic is there. Too bad regulators will question it given market concentration issues.

Moribund economic growth has tempered industrial gas demand. Global capital spending in industries that depend on refined gases has fallen by a third since 2014, notes Citi. Sales at Praxair have gone nowhere in the past few years and Linde has not done much better. Praxair has better profitability, though; its operating margins of 22 per cent are nearly double those of its German rival.

More important, Praxair has almost twice the return on capital employed. No surprise that it trades on a 50 per cent valuation premium to Linde’s eight times enterprise value to earnings before interest, tax, depreciation and amortisation.

Praxair could buy Linde and improve its lacklustre operating margins. Yet Linde is less profitable partly due to its lower margin, though well regarded, engineering division which designs industrial gas plants. Praxair may not wish to lose that unit.

Linde, including its debt, is worth €34.4bn ($38.5bn), not much smaller than the US company. The latter’s net debt of nearly $10bn suggests that a deal done mostly in shares would be preferable.

Assuming a healthy premium of 30 per cent over the Monday closing price for Linde, and a deal done 70 per cent in shares, Praxair should need to find about $1.3bn in annual cost savings to earn back the premium. That would mean slicing just under a fifth from the combined overhead of the new group.

While that looks plausible, surviving a noxious regulatory scrutiny process does not. In the US alone these two would control nearly half of the oxygen and nitrogen market. Europe has a very concentrated market, too. Floating a merger is one thing; getting it to fly is quite another.

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Chart: Heavier than air

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