Air Products Wants Airgas

Air Products & Chemicals is launching a hostile tender offer for Airgas’ shares after Airgas rejected an unsolicited $60-per-share cash takeover offer. The bid values Airgas, the largest packaged-gas supplier in the U.S., at $7.0 billion, including $1.9 billion in debt.

At the heart of Airgas’ argument is shareholder returns. In recent years, Air Products’ returns have outperformed Airgas’. Over longer periods of time, however, Airgas says, its returns far outstrip Air Products’. According to Airgas, it has generated a return of 516% since 2001, whereas an investment in Air Products would have brought in 142%.

Airgas says Air Products is trying to take advantage of a recent slump. “We can certainly understand why Air Products would find an opportunistic acquisition of Airgas to be appealing to Air Products and its stockholders,” wrote Peter McCausland, Airgas’ founder and CEO, in a letter to Air Products CEO John E. McGlade. “However, it makes no sense for the Airgas stockholders to transfer the future value of Airgas to Air Products at a bargain basement price.”

Airgas previously rebuffed two undisclosed acquisition overtures from Air Products. One was an all-stock offer in October worth $60 per share, and the other was a December bid of $62 per share in stock and cash.

For its part, Air Products says the deal is an attractive one for Airgas shareholders. It represents a 38% premium over the firm’s share price on the eve of the bid and an 18% premium over its 52-week high. In fact, Air Products has filed a complaint with the Delaware Court of Chancery arguing that McCausland and the Airgas board neglected their fiduciary duties to shareholders by refusing to negotiate.

Air Products says that Airgas’ points about shareholder returns aren’t relevant to the all-cash offer. “We respect Peter McCausland and greatly admire the company he founded and matured, but we fundamentally disagree with him on achievable standalone value and do not believe his approach is in the best interests of the owners of the other approximately 90% of Airgas shares,” the company said in a statement when it proceeded with the tender offer.

Air Products had sales in its most recent fiscal year of $8.3 billion. Airgas generated total revenues of $3.9 billion in 2009. Should a deal be completed, Air Products would become the largest industrial gas company in North America.

Airgas commands about one-quarter of the highly fragmented U.S. market for packaged gases. In that business, canisters of gases such as helium, oxygen, carbon dioxide, and argon are delivered to welders, medical facilities, restaurants, food manufacturers, and the like.

Air Products, which deals mainly in bulk gases, was a player in packaged gases until 2002, when it sold its business to Airgas for $270 million. When asked at an employee meeting why Air Products would seek to reenter the business, McGlade noted that the business Air Products sold was a small regional player that didn’t have nearly Airgas’ market density. Air Products still runs a packaged-gases business in Europe.

Air Products argues that a combination with Airgas would capture some $250 million in annual cost synergies. It contends that the combined company would expand at an annual rate of 1 to 2% greater than either of the two firms could grow on their own.

Jefferies & Co. stock analyst Laurence Alexander says Airgas could benefit from Air Products’ experience as it changes focus from integrating acquisitions to improving operations. He suspects Airgas might be holding out for more money. With Airgas’ stock now trading at more than the $60-per-share offer price, this is a view that the market apparently shares.

“McCausland isn’t by any stretch of the imagination a wilting violet,” Alexander told clients in a conference call. “He’ll definitely fight on valuation.”

On the basis of “Air Products’ clear intent to pursue the acquisition further, we believe there is a good chance it will raise its bid up to $70 per share,” agrees David Begleiter, a stock analyst with Deutsche Bank.