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Air Product Makes Offer for Airgas

|Includes: AIQUF, Air Products and Chemicals, Inc. (APD)

On the tape (Bloomberg):

Air Products & Chemicals Inc. said it may take a $5.1 billion cash offer (10.5x EBITDA, I can't tie that out but it was quoted in the call) for Airgas Inc. straight to shareholders after its rival spurned two prior attempts to create the largest U.S. industrial gas company.
The $60-a-share bid is 38 percent higher than Airgas’s closing price yesterday and is worth about $7 billion including $1.9 billion in assumed debt.
The rationale (from the lawsuit filed):

Today, Air Products is a leader in the delivery of tonnage gas (i.e., gas delivered via pipeline) and liquid bulk gas (i.e., gas delivered via tanker trucks).  On the other hand, the heart of Airgas’s business—built through over 400 acquisitions—is the delivery of packaged gas (i.e., gas delivered via small cylinders and dewars) to small-volume industrial, medical, and specialty users.  Combining these two businesses would marry Air Products’ leading bulk infrastructure, engineering, and low-cost supply with Airgas’s leading packaged gas distribution and sales systems.  The result: the leading gas company in America, able to offer a wide variety of gas products more efficiently and at lower cost.

Air Products concluded that the combined company would:

  • Result in a geographically diverse, full-service business in all three modes of industrial gas supply: packaged, liquid bulk and tonnage;  
  • Create the largest industrial gas company in North America and the third largest industrial gas company in the world, headquartered in Pennsylvania; 
  • Provide an integrated platform of engineering, operations and back office capabilities;
  • Possess enhanced capabilities to reach and service customers;
  • Increase cash flow and access to capital to fund expansion globally;
  • Reduce costs; and
  • Propel the combined company to grow materially faster than the respective companies could grow alone.
Currently APD (A2/A stable/stable) has around $300MM in cash, $4.5B in debt and generates approximately $2B in TTM EBITDA. Airgas brings $1.9B in debt and TTM EBITDA of $663MM.

Doing the simple math (yes, I realize it is simplistic, back of the envelope math), we have $6.4B debt and $2.7B TTM EBITDA. Within 2 years, management expects to realize a 300bp expansion in the EBITDA margin.  This gives us a leverage multiple of 2.3x.  When we add the $5B in acquisition debt, we come to a leverage multiple of 4.2x.  This is not a single A rating multiple.

From Moody's last ratings update (8/18/09):
The failure of the company to make meaningful progress in improving financial metrics by the end of the first calendar quarter of 2010 could cause Moody's to change the company's outlook to negative. Sizable share repurchases or acquisitions could also have a negative impact on the outlook or rating at the current time.

I am thinking the company could shake out around mid-BBB (worst case low BBB) if they can sell asset sales and debt repayment through cash flow to the agencies.  This is, of course, if the deal goes through.

Personally, I think the combination is compelling and could help expand APD's business while stabilizing cash flows.

Bonds: spreads are out around 20bps (mid 90s using last trace levels on the '19s) - keep in mind, at mid-BBB we should expect north of +125.
CDS:  out 30 to 75/85
Equity: $68.52 -$5.21 (at time of writing) -7%

Not a buyer of the capital structure here.

Disclosure: no positions