Air Products – Sit On The Sidelines, Or “Suit-Up”

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In research published today we share thoughts about the proposed PX/Linde merger, which we think is more likely to be a PX acquisition of Linde – should it go ahead. However, what APD could do matters.

  • We are assuming that Air Liquide is busy and is probably only a participant here as a possible buyer of assets that PX/Linde might need to sell – in particular air separation units in the US.
  • But Air Products is a very different story:
    • Done with most of the easy cost cutting opportunities – with return on capital and earnings now more appropriately reflecting the business mix.
    • Done with divestments – sale and impending spin – exiting materials and electronics and so now focused on Industrial Gas.
    • Sub scale and not integrated into packaged gas in the US – limiting margin, operating rates and growth.
    • Limited new investment opportunities and those are generally large on-site in China with greater risk (we have seen some delays) and lower returns – these have paid off in 2015 and 2016 on a relative basis given limited growth elsewhere in the world.
    • No desire to go off-piste following waste to energy debacle in the UK (prior management agreed to these investments).
  • If APD sits back and watches PX/LIN, it will become a distant 3rd player in industrial gases – marginalized in the US, even if it does pick up assets that the regulators force PX/LIN to sell.
    • The risk is that forced divestments are limited and add more value for Airgas, which outbids APD or raises the price and makes the returns low for APD.
    • APD more likely to take assets outside the US where PX/LIN forced to divest and Air Liquide already present.
  • If PX and Linde merge – there is no-one left for APD to deal with as a “next step”. So….
    • Should APD make a counter bid for LIN – it is in better shape financially than PX – Exhibits 1 and 2 – and would probably meet less regulatory resistance in the US because of small footprint.
    • Should APD offer itself up for sale to LIN?
      • This would be a good “end game” for the APD CEO.
      • It might appeal to LIN if the company does not want to be acquired by PX.
  • This, of course leaves us with an un-investable conclusion.
    • APD is a clear buy if there is a chance LIN would make a bid, but this is very long-odds.
    • APD may be able to grow by buying assets divested by PX/LIN and may benefit from further consolidation, but this is incremental and the stock is already expensive.
    • APD could lose share in the medium to long term to a more powerful Air Liquide (Airgas) and PX/LIN and on that basis the stock may be seeing a peak today.

Exhibit 1

Source: Capital IQ, SSR Analysis

Exhibit 2

Source: Capital IQ, SSR Analysis

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