The Linde Group Logo (Source: The Linde Group website, Press Services, 2018)
The European Commission has opened an in-depth investigation to assess a proposed merger between German industrial gases group Linde and US peer Praxair Inc., under the EU Merger Regulation. The official announcement came last Friday, as the Commission said it has concerns “that the merger may reduce competition in the supply of several crucial gases, like oxygen and helium”. The proposed $85 billion deal, announced in December 2016, would indeed create the world’s largest industrial gas-maker ahead of France’s Air Liquide, with a total expected revenue of $28.7 billion and 88,000 staff.
Background
It was December 20, 2016 when two of the world’s leaders in the industrial gases industry announced the intention to merge and create the largest company of the sector in the world. A Munich, Germany – Danbury, Connecticut joint press release was quoting Steve Angel, Praxair’s Chairman and CEO saying that the merger was expected to leverage the complementary strengths of each company, and to create “a more resilient portfolio with increased exposure to long-term macro growth trends”. “We consider this to be a true strategic merger, as it brings together the capabilities, talented people and best-in-class processes of both companies, creating a unique and compelling opportunity for all of our stakeholders”, Mr. Angel said at the end of 2016.
Bumpy road
However, the merger had to face a bumpy road until it got to its final shape. It already collapsed in late 2016 after Linde’s workers rallied against it, and had to face tough times again in early 2017 as labour unions were threatening to block it. A new deal with better terms for German workers then emerged and so it could go ahead, until the two companies spoke publicly again, with a special mention to the next, big, test: an antitrust investigation by the European Commission.
“In the course of the antitrust proceedings in the European Union, Linde and Praxair will not submit final commitments to the European Commission in this first investigation phase (phase I)”, Linde AG announced through an official statement published earlier this month. “Therefore, the merger partners expect that the European Commission will initiate an in-depth investigation (phase II)”, Linde added.
“In-depth investigation”
Linde’s forecast was indeed about right. Last Friday, the European Commission announced it was going ahead with an in-depth investigation into the proposed merger between the two giants of the industrial gases industry, over fears that the proposed transaction would “reduce the competitive pressure in markets covering a significant part of the activities of Praxair and Linde”. In particular, the Commission’s initial market investigation raised competition concerns for the supply of industrial gases, medical gases (and related services), speciality gases, as well as the supply of helium.
The Commission said that, after a first market investigation, only the four main players of the industrial gases industry have the engineering capabilities necessary to bid for the largest tonnage projects (i.e. the construction of dedicated gas production units on customer manufacturing sites). According to the Commission, the investigation also confirmed that only they have the necessary access to sources of helium worldwide to be competitive.
Reduction of major players
For these reasons, the Commission believes that the reduction of the major players from four to three would significantly deteriorate the customers’ ability to “obtain critical inputs and products” at competitive prices. Moreover, the European Commission says there is no indication that competition could be fostered by new entrants, due to the very high investment necessary to establish a meaningful position in the market after a Linde-Praxair merger.
Commissioner Margrethe Vestager, responsible for competition policy, said: “Gases – like oxygen and helium – are crucial inputs for a large variety of products we use every day. Manufacturers need to buy these gases from a small number of suppliers. We will carefully assess whether the proposed merger between Praxair and Linde would lead to higher prices or less choice for European consumers and businesses”.
Agreed threshold
The proposed Linde-Praxair merger has seemingly no easy road ahead again. The two merging companies have agreed that either can walk away from the deal without penalty if the regulators’ demand of business disposal would result to be too high for them. On the statement published earlier this month, Linde said that discussion with antitrust authorities has resulted in indications that merger clearance of the business combination with Praxair will be subject to requirements “more onerous than previously assumed”.
The statement reported that the two companies agreed on a sort of “pain threshold”, up to which a merger would no longer make sense. If regulators demand the disposal of businesses with more than $3.7 billion in sales or $1.1 billion in earnings before interest, taxes, depreciation and amortization (EBITDA), either party can withdraw without penalty.
Next steps
The proposed Linde-Praxair merger has seemingly no easy road ahead again. The Commission said it had 90 working days, until July 4, to take a decision, as well as it underlined that the opening of an in-depth investigation does not prejudge the outcome of the investigation.
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