The worldwide gases business is conservatively valued at £20bn. And the industry reckons that it will continue to outpace GDP growth in every industrialised country as output grows and more varied uses are found for the 25,000 or so speciality gases that are produced.
Given this outlook, it was not surprising that BOC, the second largest global player (after Air Liquide), with sales of £3.05bn, became the target of a £8.2bn takeover bid from two of its closest rivals last July.
The economics of the bid, from Air Liquide of France and Air Products of the US, made sense. Consolidation, economies of scale and supply chain efficiencies would have led to a leaner, more profitable combined business.
The predators eagerly anticipated dividing up the spoils of the BOC empire, with Air Liquide inheriting the target firm’s European assets, Air Products taking over its Australian operations and both of them profiting from BOC’s `crown-jewels’ business in North America.
The generosity of the offer, at £14.60 a share, eventually won over the BOC board, some of whom would have done exceedingly well from the deal – for example, Danny Rosenkranz, the chief executive officer, stood to gain £5.2m from his shares and options.
It seemed like a deal from which all three companies would benefit, until the US Federal Trade Commission this month rejected the deal on the grounds that it placed too much power in the hands of the Air Liquide/Air Products grouping. Without FTC approval and with the pre-agreed time limit on the takeover expiring on May 12, the deal collapsed.
After making an unsuccessful offer to scale back their plans in North America during 10 months of talks with the FTC, Air Liquide and Air Products acknowledged the failure of their bid, which was conditional on winning the North American assets.
BOC has been left in a contradictory position. The company issued a statement which said it had no intention of waiving the pre-conditions, or extending the period in which they could be satisfied. So, having enthusiastically promoted the logic of the consolidation with Air Liquide and Air Products, BOC now has the task of persuading its shareholders and the market that it is better off, after all, on its own.
Shortly after the news that the FTC had refused the necessary clearance, the board asserted that BOC was going to pursue a strategy of independence. The company was being reshaped, it was stated.
Tony Isaac, the group chief executive officer, pointed to restructuring over the past two years and productivity improvements which `position BOC to achieve top-line growth and develop its position as the world’s number two industrial gases company’.
The BOC board now claims that the failure of the takeover attempt could, ironically, spur new growth for the company. Its efficiency project Renew, which stalled during the negotiations, will be restarted, delivering an extra £15-20m of operational savings.
Nigel Abbott, one of the group’s investor relations managers, says: `We are the world’s number two industrial gases group and have been independent up until now. We could come out of this very strongly.’ Industry watchers, however, have questioned BOC’s place in what is likely to become an increasingly competitive market.
City analysts say BOC’s continued independence is untenable in the long-term: multinational customers want a one-stop-shop supplier of industrial gases in all their markets and BOC, on its own, is not well placed to deliver such a service. The group is also seen by some to be less profitable than its rivals.
Philip Morrish, analyst at Albert E Sharpe, says: `The consolidation of the industry is being driven by global customers who want a one-stop-shop for their industrial gas demands. And BOC’s margins are nowhere near as good as those at a company such as Air Liquide, for example. You have to put it down to lax management – they haven’t beaten the business hard enough.’
Consolidation still on the cards
Industrial gases are increasingly high-tech and innovative. It is a little realised fact that they underpin much of the high-technology sector. While gases are still used in huge quantities in traditional industries such as steelmaking, the business has now penetrated most areas of the new economy.
Speciality gases are used in the manufacture of mobile phones, VCRs, computers, digital cameras, and most other electronic goods. They are also used in the production of pharmaceuticals as well as the more traditional industries of metals, petroleum and gas production.
Although BOC is safe from another predatory approach from Air Products and Air Liquide for a year and a day, according to Stock Exchange rules, pundits reckon that the allure of consolidation is not going to go away. While it may not be possible in the North American market because of regulatory restrictions, it would be elsewhere.
Industry analysts say it is likely BOC could become involved in another merger bid by the second quarter of next year. However, this time BOC could be the predator. While Air Liquide may be too big a target to take on, there are other lower-ranking suppliers, such as Praxair of the US, Linde of Germany and Air Products, which could succumb to the attractions of becoming a bigger hitter.
Ironically, in financial terms at least, BOC has come out of the aborted takeover stronger than Air Liquide or Air Products. Its balance sheet has been boosted: as a contractual consequence of the failed takeover it has been paid $100m compensation by the two would-be predators.
And both of them have had to shoulder the cost of the failed takeover attempt. In the case of Air Products the price has been onerous – it has had to write off $450m.
Morrish says: `Consolidation is not going to go away. The market does not rule out more corporate action in this sector. I see further takeovers – but this time BOC could well be the bidder rather than the biddee.’
Major users of industrial gases
* Semiconductors Ultra high-purity nitrogen, oxygen and a range of speciality gas mixtures are needed in the production process and, given the growth of the sector, in increasing volumes. The latest generation of high-density devices requires nitrogen of a purity of less than one part per billion of gaseous contaminants.
* Metals Oxygen is required to improve productivity in blast furnaces producing iron, electric steel making and non-ferrous smelting. Prospects for increased oxygen use are strong because blast furnaces are becoming more oxygen-hungry due to the increased use of coal in place of coke. And alternatives to the conventional blast furnace are being developed that consume massive amounts of oxygen – 10 times as much per tonne of metal as blast furnaces.
* Glass During manufacture, oxygen-enriched combustion will be increasingly needed for better fuel efficiency and reduced emissions. Nitrogen is used as an inert `blanket’ and, in float glass manufacture, hydrogen is used on the metal surface.
* Food Greater consumption of chilled/frozen food and its transportation is pushing up demand for nitrogen and carbon dioxide as refrigerants.
* Fabrication In addition to the traditional welding gases – oxygen, acetylene, propane and propylene – BOC supplies sophisticated mixtures for arc welding and for laser and plasma cutting and welding.
* Chemicals and petroleum Large quantities of gas are used to force oil from production fields and mixtures are provided to enable plants to meet pollution standards.