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Shares of Praxair (PX) are trading roughly unchanged since the start of the year. Shares of the industrial gasses supplier have traded in a tight $110-$115 range in the first seven weeks of the year. Praxair announced the acquisition of NuCO2, a provider of beverage carbonation solutions in the first week of February.

The Deal

Praxair announced that it agreed to acquire NuCO2, a leading provider of beverage carbonation solutions to the restaurant and hospitality industries in the US. The 900 employees of the firm serve its customers in over 162,000 locations.

Praxair paid $1.1 billion in cash for NuCO2 to its owners, private equity firm Aurora Capital Group.

NuCO2's micro-bulk beverage carbonation solutions is a service model of choice for quick service restaurants and convenience stores offering fountain beverages. With the acquisition, Praxair furthermore expands its product offering for establishments with draught and craft beers to include nitrogen generations and blending control systems.

Executive vice president Eduardo Menezes commented on the deal, "NuCO2 offers a compelling value proposition for beverage carbonation. We plan to continue to grow the business in the United States, enhance distribution efficiency utilizing Praxair's competencies in logistics, and extend NuCO2's offerings to customers in other regions of the world."

NuCO2 is expected to generate $250 million in full year sales for 2013, on which the firm is expected to generate annual EBITDA of $115 million. The deal values the firm at 4.4 times annual revenues and 9.6 times annual EBITDA.

The deal is expected to be neutral or slightly accretive to Praxair's earnings per share in 2013, is expected to close in the first quarter of 2013 and is subject to regulatory approval and normal closing conditions.

Valuation

Praxair ended its full year of 2012 with $157 million in cash and equivalents and it operates with $7.36 billion in short and long term debt, for a net debt position of $7.2 billion.

The company generated revenues of $11.2 billion on which it net earned $1.69 billion, or $5.61 per diluted share. The company guides for full year revenues of $12 billion for 2013, on which the company could earn $5.85-$6.10 per share.

The market currently values Praxair at $32.7 billion. This values the firm at 2.7 times 2013's annual revenues and 18-19 times annual earnings. Praxair pays a quarterly dividend of $0.60 per share for an annual dividend yield of 2.2%.

Some Historical Perspective

Shares of Praxair also traded in a relatively tight $100-$115 range for most of the past year. Currently shares are trading at $110 per share, in sight of all time highs of $117 set in April of 2012.

Between 2009 and 2012, Praxair has grown its annual revenues from $9.0 billion to $11.2 billion. Earnings rose from $1.25 billion to $1.69 billion, with earnings per share increasing a little faster after the firm retired 3% of its shares outstanding over the time period.

Investment Thesis

Shareholders of Praxair hardly reacted to the deal with NuCO2, sending shares 0.4% higher on the day of the announcement. The deal itself is rather small; NuCO2's annual revenues of $250 million will add merely 2.2% in annual revenues.

The deal multiples seem fair. While Praxair pays 4.4 times annual revenues for NuCO2, which is higher than Praxair's own multiple of 2.9 times revenues, the EBITDA multiples are in line. Praxair values NuCO2 at 9.6 times annual EBITDA, similar to Praxair's own valuation at 9.2 times EBITDA.

The deal seems to be executed at fair levels and the valuation multiples seem reasonable. A modest accretion to earnings per share seems reasonable given the fact that the company recently borrowed $400 million for three years at 0.75%, and another $500 million for ten years at 2.7%. The modest increase in leverage is most certainly attractive given that the company can borrow at these ultra-low rates.

The overall valuation is a little rich for me, given the fairly high price-earnings ratio and the reasonable leverage already employed. Yet the company has gained a lot of respect within the investment community as it also delivered in harsh times, historically.

Over the past decade alone, shares have quadrupled as the company has benefited from the increased installment of on-site industrial gas production facilities. Strong pricing power as a result of a superior competitive position has resulted in this strong and predictable revenue and earnings growth over the long term.

The overall valuation is in line with historical valuation multiples but at these all time highs I see little reason to expect spectacular returns in the short to medium term, although I like the long term performance and prospects of the firm as part of a long term diversified portfolio.

For now, I will stay on the sidelines.

Source: Praxair - Small Acquisition Does Not Alter Investment Recommendation