Air Products & Chemicals Inc. (NYSE: APD) may have opened up a can of worms with its planned acquisition of Airgas Inc. (NYSE: ARG).  For starters, Air Products has a market cap of $14.5 billion.  Airgas has a market cap of almost $5 billion after the 40% gain since the deal was announced.  This merger brings up many questions that have few answers.

The $5.1 billion deal is actually closer to a $7 billion deal if you tally up the debt.  This is a $60 per share cash deal.  It effectively turns a large profit for every single shareholder.

Airgas shares traded above the offered price this morning, which of course is the signal from the trading community that either Air Products & Chemicals would be willing to pay more or that another buyer would pay more.  Airgas announced that it will review the offer with financial and legal advisors, but as of this morning it recommended that its stockholders take no action yet.  Air Products & Chemicals has also signaled that this could become a hostile deal, and it has made two written offers already.

This merger would turn the operation into one of the largest industrial gas companies in the world, with many operations across many sectors.  On the surface, it looks as though the combined company would be the largest in the United States.  That raises the question, “Will regulators allow this merger?”   We have a new DOJ here that at least on the surface appears to be giving deeper merger reviews than what we saw from 2000 to 2008.  The company has said it would be willing to make divestitures or sales if needed.

It appears that the  financing question is answered as Air Products noted that JPMorgan has already given the funding commitment.  This is key because the company has nowhere near enough cash and liquidity on its books to finance this deal.

And then there is the options trading.  Joe Kunkle of OptionsHawk.com noted, “AirGas shares were trading at $43.70 yesterday and I noted suspicious buying of calls to my clients…. The action is very odd considering the recent gap down on earnings, and must be betting on some type of takeover to take shares more than 30% higher in the next few months.”

Another issue is whether holders of Air Products & Chemicals holders will be in favor of the deal.  Shares were down 7.8% at $67.90 in late morning trade.  Airgas shareholders have a huge reward as shares are up at $60.08 and traded as high as $62.82 today to a new 52-week high.  Airgas has traded slightly above $60 back in 2008, but that was before shares went all the way to $30.00.  The peak seen in shares was just over $50 in late-2009.

JON C. OGG

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