09.02.18
Praxair, Inc. (PX: Hold, $152 PT)
Flashing Yellow Light on MOE with Linde
• Regulatory review of Praxair-Linde deal looks more challenging. According to a Bloomberg report this morning, Linde and Praxair are facing an increasingly onerous negotiation process to win approval from the European Union for the companies’ pending merger. Linde warned last month that the EU process could be tougher than expected, but it appears that concerns have grown following a 23 March meeting between officials and the two companies. According to Bloomberg, “Linde and Praxair representatives are increasingly worried that they might not be able to offer the sell-offs that would satisfy the regulators.” While not explicitly mentioned, the report implies that divestiture requirements may approach the hard limit of assets generating €3.7bn in annual sales or €1.1bn in annual EBITDA. We note that the process is still ongoing, and without a formal statement of objections from the European Commission (EC), the parties may not yet know the exact concerns. That said, we judge that the level of required divestitures as well as overall deal risk are on the rise. In this context, we reduce our price target by $7 to $152 as we discuss below. With regard to peer Air Products, we leave our target unchanged for now at $164. While a broken deal scenario would be unhelpful, APD could also benefit in a completed deal scenario wherein Praxair-Linde must divest (additional) assets.
• Greater scrutiny from Europe would be consistent with trends witnessed elsewhere. In prior research we have noted a trend toward increased regulatory scrutiny of cross-border deals, whether it’s Dow-DuPont, Bayer-Monsanto, Tronox-Cristal, or the (aborted) Celanese-Blackstone acetate tow joint venture. In this light, news of the European Commission setting higher than expected hurdles for merger completion is not terribly surprising. This is especially true when one considers the market share positions within the EU and the impact the merger will have on the industrial gas market’s HHI score, as shown in Figure 1. The general rule of thumb in the EU on horizontal mergers provides that…
• Not all industrial gas assets are created equal. Many assets in question, such as merchant and packaged gases, are truly local businesses with economic distribution radii of less than 300 kilometers typically. Here, a continental market share-based approach here is too broad in our view. However, we believe the regulators’ concerns likely extend to...
• What happens if the divestiture limit were exceeded? Praxair and Linde had set hard limits on divestiture requirements at €3.7bn in revenues or €1.1bn in EBITDA, and set a hard deadline for deal completion of 24 October, 2018. We note that the EC’s review of Linde and Praxair currently has a 9 August deadline, though this has been pushed back a number of times already and will likely continue to slide. While headlines today point...
• We trim our price target based on three factors. We decrease our price target by $7 to $152, which suggests that shares offer upside of 8%, including a dividend yield of 2.3%. Our new target reflects a lower probability of deal closing, a higher level of “peel-off” divestitures, and lower market multiple relative to our most recent model revision. Specifically, our updated analysis, shown in Figure 2, increases the divestiture requirement to $3.8bn in sales (still below the limit) and drops the synergy target to $915mn. This lowers our estimated EPS accretion from $1.40 to $1.20, which when applied to a new 70% chance of deal approval, results in a decrease of deal value by $5 to just shy of $14 per share. The additional $2 decrease to our target price reflects a lower multiple for the S&P500 index. Our prior target of $159 had incorporated deal value of $19 per share based on estimated EPS accretion of $1.40. The analysis reflected $1.5bn in divested revenues, $1bn in synergies (which implied a 5.5% synergy as a percent of remaining sales), and an 80% likelihood of deal completion. As a reminder, we value PX based on an average of our DCF analysis and a relative P/E-based framework. Our updated DCF analysis suggests a warranted stock price of $142, and includes a weighted-average cost of capital (WACC) estimate of 7.8% and a terminal growth rate of 2.5%. Our relative P/E-based framework indicates a warranted value of $135 per share based on a 20% premium to the S&P500 index’s multiple. Finally, we attribute additional value of $14 per share to reflect the expected value to be created from Praxair’s pending MOE with Linde.
(Please see full report for details)
Flashing Yellow Light on MOE with Linde
• Regulatory review of Praxair-Linde deal looks more challenging. According to a Bloomberg report this morning, Linde and Praxair are facing an increasingly onerous negotiation process to win approval from the European Union for the companies’ pending merger. Linde warned last month that the EU process could be tougher than expected, but it appears that concerns have grown following a 23 March meeting between officials and the two companies. According to Bloomberg, “Linde and Praxair representatives are increasingly worried that they might not be able to offer the sell-offs that would satisfy the regulators.” While not explicitly mentioned, the report implies that divestiture requirements may approach the hard limit of assets generating €3.7bn in annual sales or €1.1bn in annual EBITDA. We note that the process is still ongoing, and without a formal statement of objections from the European Commission (EC), the parties may not yet know the exact concerns. That said, we judge that the level of required divestitures as well as overall deal risk are on the rise. In this context, we reduce our price target by $7 to $152 as we discuss below. With regard to peer Air Products, we leave our target unchanged for now at $164. While a broken deal scenario would be unhelpful, APD could also benefit in a completed deal scenario wherein Praxair-Linde must divest (additional) assets.
• Greater scrutiny from Europe would be consistent with trends witnessed elsewhere. In prior research we have noted a trend toward increased regulatory scrutiny of cross-border deals, whether it’s Dow-DuPont, Bayer-Monsanto, Tronox-Cristal, or the (aborted) Celanese-Blackstone acetate tow joint venture. In this light, news of the European Commission setting higher than expected hurdles for merger completion is not terribly surprising. This is especially true when one considers the market share positions within the EU and the impact the merger will have on the industrial gas market’s HHI score, as shown in Figure 1. The general rule of thumb in the EU on horizontal mergers provides that…
• Not all industrial gas assets are created equal. Many assets in question, such as merchant and packaged gases, are truly local businesses with economic distribution radii of less than 300 kilometers typically. Here, a continental market share-based approach here is too broad in our view. However, we believe the regulators’ concerns likely extend to...
• What happens if the divestiture limit were exceeded? Praxair and Linde had set hard limits on divestiture requirements at €3.7bn in revenues or €1.1bn in EBITDA, and set a hard deadline for deal completion of 24 October, 2018. We note that the EC’s review of Linde and Praxair currently has a 9 August deadline, though this has been pushed back a number of times already and will likely continue to slide. While headlines today point...
• We trim our price target based on three factors. We decrease our price target by $7 to $152, which suggests that shares offer upside of 8%, including a dividend yield of 2.3%. Our new target reflects a lower probability of deal closing, a higher level of “peel-off” divestitures, and lower market multiple relative to our most recent model revision. Specifically, our updated analysis, shown in Figure 2, increases the divestiture requirement to $3.8bn in sales (still below the limit) and drops the synergy target to $915mn. This lowers our estimated EPS accretion from $1.40 to $1.20, which when applied to a new 70% chance of deal approval, results in a decrease of deal value by $5 to just shy of $14 per share. The additional $2 decrease to our target price reflects a lower multiple for the S&P500 index. Our prior target of $159 had incorporated deal value of $19 per share based on estimated EPS accretion of $1.40. The analysis reflected $1.5bn in divested revenues, $1bn in synergies (which implied a 5.5% synergy as a percent of remaining sales), and an 80% likelihood of deal completion. As a reminder, we value PX based on an average of our DCF analysis and a relative P/E-based framework. Our updated DCF analysis suggests a warranted stock price of $142, and includes a weighted-average cost of capital (WACC) estimate of 7.8% and a terminal growth rate of 2.5%. Our relative P/E-based framework indicates a warranted value of $135 per share based on a 20% premium to the S&P500 index’s multiple. Finally, we attribute additional value of $14 per share to reflect the expected value to be created from Praxair’s pending MOE with Linde.
(Please see full report for details)
