Something’s In The Air

ASIDE from oxygen-quaffing mountaineers and scuba divers, few consumers give a thought to the normally stable world of making industrial gases. Yet the sector, essential for much other manufacturing, is now gripped by discussion of mega-mergers as big firms on either side of the Atlantic jostle for advantage.

This week brought renewed talk of a long-expected tie-up. Analysts have speculated for a while about a possible family reunion between Linde, a German firm with a market value of $30 billion, and Praxair, an American rival of similar value that is more profitable. Praxair originally sprang from its European parent over a century ago. The talks are at an early stage. A union would produce the leader in industrial gases, with a market share of about 40%.

It would suit the companies, less so consumers. Praxair does well selling gases for industrial use, chiefly in America. The food industry needs carbon dioxide, in fizzy drinks or to get caffeine from coffee, for example. Linde, in contrast, has expertise in the long-term growth area of gases for medical use. Supplying oxygen to hospitals is expected to be profitable as ageing societies see more elderly patients under long-term care.
Merging Praxair and Linde, probably by swapping shares, would reduce competition, which is worrying considering that four companies already control three-quarters of the global market, and in some countries more. The firms, by announcing their talks, presumably believe they have answers to antitrust concerns, and might offer to sell some regional businesses.

Consumers might prefer the talks to fail. The proposed merger is hardly the product of a sparkling imagination. Hamza Khan of ING, a bank, says that in a low-margin environment, the two firms are simply seeking efficiency by getting bigger. Innovation is limited, so competitors dream mostly of winning clout, buying rivals and especially getting more access to contracts as a dedicated supplier to a big customer, such as a steel plant.

Around a third of sales of industrial gas are of this sort, producing stable businesses living off contracts with guaranteed minimum fees and long terms. Even so, the industry does not look in fine fettle. Firms were overconfident, building too much production capacity. Returns on invested capital for the four big companies (the other two are France’s Air Liquide and America’s Air Products) have slumped since 2011.

Linde undoubtedly needs the biggest shake. It has issued two profit warnings in the past two years, a sign the underlying business is in a fix. Internal squabbles haven’t helped. An embittered finance chief, Georg Denoke, seemed to reckon he should be boss rather than Wolfgang Buchele, the current CEO, who looks unsure of how to take charge. Adding to the mess, a former CEO, Wolfgang Reitzle, became Linde’s chairman in May. Ambitious, combative and publicly critical of the firm’s recent showing, the former boss sounds like a tricky colleague. But he also has a recent record of pushing big mergers, and may be the one behind the talks with Praxair.

#TheEconomist

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