EUR 850.00 For Business Accounts Only

Morningstar | Praxair-Linde Merger Approved; We're Raising Our FVE to $167

We’re raising our fair value estimate for wide-moat industrial gas firm Praxair to $167 per share from $157 after the company received approval from the U.S. Federal Trade Commission to close its merger with Linde. This increase reflects the time value of money since our previous update as well as revised assumptions regarding the impact of the merger, now that the last regulatory hurdle has been cleared and we have a clearer picture of what the combined entity will look like.

Praxair and Linde will have to complete significant divestitures by Jan. 29, 2019, before they can combine their businesses. We are modeling the divestment of virtually all of Praxair’s European business and a significant portion of Linde’s assets in the Americas, including most of its American on-site business. Despite the divestments, Linde plc, the combined entity, will surpass Air Liquide as the largest industrial gas supplier in the world.

Based on our analysis, the Praxair-Linde merger should create shareholder value, the extent of which will be determined by Linde plc’s ability to achieve synergies. Our base-case scenario assumes that about 75% of the $1.2 billion synergies expected by management will be realized. We project that the synergies will take about three years to achieve and cost approximately $1 billion to implement, which is consistent with management’s expectations. As such, we forecast operating margins to expand from roughly 22% in 2017 to about 26.5% in 2022, after the restructuring is complete.

If management can achieve its target synergies and apply the strategies that drove Praxair’s industry-leading operating margins to Linde’s low-earning EUR 33 billion asset base (nearly twice the size of Praxair’s), the merger should create meaningful value for shareholders.