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Category → Industrial Gases

Airgas Slaps Air Products

Airgas has rejected Air Products’ “best and final” offer to purchase it for $70 per share. This marks the sixth offer that Airgas’ board has rebuffed.

The key line in the press release is this one:

“…the Board unanimously concluded that the $70 per share offer is clearly inadequate and that the value of Airgas in a sale, at this time, is at least $78.00 per share, in light of the Board’s view of relevant valuation metrics.”

What this means is that the three directors that Air Products nominated to Airgas board–and were elected largely by new, deal arbitrage shareholders at Airgas’ annual meeting in September—not only agreed to reject the offer but also recommended a price of $78 per share.

This is a blow to Air Products. I will be very surprised if Air Products does anything other than quickly withdraw its offer. How on earth could they raise the bid by $6 or $8 after putting a “best and final” stamp @ $70?

UPDATE: Air Products has responded. In the statement, Air Products CEO McGlade talks about how awesome his $70 per share offer is.  “Our offer expires on January 14,” he added. In other words, “I’m getting my coat. I’m putting my coat on. Now I’m putting my hat on. I’m walking for the door. I’ll turn around if you change your mind. I’m turning the doorknob…”

What’s The Airgas Shareholder’s Motivation?

Since I found out that 23.2% of Airgas’ shares have been tendered to Air Products at $63.50 per share, all while the market price for these shares have remained above $65, I have struggled with a question: Why would someone want to offer their shares for sale at less than the prevailing price?

Now, suppose I had been an Airgas shareholder before Air Products’ $60 per share offer was disclosed back in February. Let’s say I purchased my shares at about $40 or so. I would have sold my shares immediately on the news to lock in a tidy profit. I wouldn’t want to risk that profit for a measly $2 or $3 gain later on.

The people that I would be selling my shares to would be deal arbitrageurs, often referred to as “arbs”. They earn their money specializing in buying stock of companies that have just announced deals. They hold onto their shares until the deal is consummated. For example, let’s say Company X’s shares are selling for $20 per share. It announces an agreement to be purchased by Company Y for $30 per share in a deal that is expected to be consummated in several months.

Shares in Company X will immediately jump, but not likely to $30, but rather to something like $27 or $28 per share. This is because there is always uncertainty about whether the deal will actually get done. Regulators could block the deal, Company Y would still need to do some due diligence, economic circumstances could change, and any number of other factors could scuttle the transaction. Arbs, who are deft at gauging the deal tea leaves, will happily take on the risk to make that $2 or $3 when Company Y’s purchase of Company X is completed.

This gets us back to Airgas. These arbs have been buying up the shares at above Air Products’ offer prices. They can only make money if Air Products comes in with a higher offer. They will lose a lot of money if Air Products walks away. So what do the arbs want? They want Airgas to sit at the negotiating table with Air Products to hammer out a transaction that will earn them a profit.

This might explain why they have been tendering their shares. Airgas has an annual meeting in September in which three Air Products nominees can be elected to its board. It can also be forced to hold its next annual meeting in January, which would further expedite Air Products’ board stacking. A tender can indeed be withdrawn. The arbs don’t have to ultimately sell their shares for less than what they paid for them if they don’t want to. Tendering their shares, albeit temporarily, lets Airgas’ management know that Air Products might have some support going into the annual meeting. It is a signal that they want to see the two parties come to terms.

Airgas Attacks Air Products Bid On All Fronts

Airgas has rejected Air Products & Chemicals’ offer, version 4.0.

I was a little surprised. Analysts have been talking about a potential deal for Airgas happening at about $68 to $70 per share. I thought that Air Products raising its offer from $60.00 to $63.50 might entice Airgas to the negotiating table to screw down the details.

Nope. Airgas’ reaction was a full on assault.

Using wording now familiar from the rejection of three previous offers, Airgas founder and CEO Peter McCausland, said the deal “grossly undervalues Airgas”.

Airgas message to shareholders was, “we do have a backup plan should the Air Products offer be torn asunder”. The company timed the rejection to coincide with its quarterly earnings announcement. In February, Air Products put out its $60-per-share bid a week after Airgas reported dismal earnings for its fiscal third quarter. Since then, Airgas has bounced back. Its fiscal first quarter adjusted net income of $0.83 per share is the second best quarterly performance in company history.

Moreover, Airgas raised its fiscal full year guidance from $2.95-$3.05 up to $3.15-$3.30. The company now says it is confident that it can grow earnings to $4.20 for fiscal 2012.

McCausland painted Air Products as a Johnny-come-lately. “Airgas-stockholders-not Air products—should reap the benefits of our increased earnings power and bright future,” he said.

McCausland also noted that because Airgas has been reducing debt, the $63.50 per share offer is no different than a $62 per share offer in cash and stock that Air products made back in December.

Finally, Airgas is throwing some cash back to shareholders by raising its quarterly dividend from $0.22 to $0.25 per quarter. Dividend yield at today’s prices, however, is still only about 1.5%.

Airgas was trading at levels of about $45 before the deal was announced. That’s a price Airgas shareholders don’t want to see again now that $63.50 in cash has been on the table. When Hexion sued to get out of its deal with Huntsman in 2008, Huntsman shares immediately lost half of their value, down to about $10. Before Hexion’s $28 per share offer in mid 2007, Huntsman was trading at about $20.

There were reasons why Huntsman was so severely punished by shareholders. The Huntsman drama was playing out amid the housing bubble and financial crisis. Hexion filed lengthy documents in the Delaware Court of Chancery talking about a deterioration of Huntsman’s financial condition.

Still, Airgas shareholders must know that they will have a huge haircut—and a long wait to recoup their gains–if Air Products walks away.

John E. McGlade, Air Product’s CEO, has hinted at this but he hasn’t really been coming right out with it. “We believe Airgas shareholders today face substantially more uncertain market conditions than when we commenced our offer for Airgas in February,” he said. “The certainty of a fully financed all-cash offer at a substantial premium is more attractive than ever before.”

Airgas Shareholders Want More

Air Products & Chemicals is extending its $5.1 billion tender offer for Airgas. Set to expire on April 9, it will now run through June 4.

Air Products says it nabbed 12,291 shares at $60 per share. I’m no expert on such matters to judge whether that is a large amount. It comes out to $737,460, which is nearly enough to buy a rather large house in Allentown. But it does fall short of $5.1 billion and Airgas’ 82.73 million shares outstanding. Airgas management seems to be thanking shareholders for their support as well.

Still, with Airgas trading at $4 above Air Products’ $60 per share offer, one wonders who offered his shares to Air Products for less than what he can get on the open market or would get if Air Products is forced to up its offer in the future.