BREAKINGVIEWS-Investor fears over Air Products bid look overdone

-- The authors are Reuters Breakingviews columnists. The opinions expressed are their own --

By Christopher Swann and Rob Cox

NEW YORK Feb 8 (Reuters Breakingviews) - Investors have whipped Air Products (APD.N) over its $5.1 billion hostile bid for Airgas (ARG.N). Rightly so: the deal looks unlikely to meet its cost of capital. And to gain control of its smaller rival in the commercial gas business it will need to pay more. But there's a case to be made that investors have overdone their distress.

First, consider how much market value the firm has shed since making its $60 cash bid public on Friday. Though the stock bounced slightly on Monday, it's off about $4.80 a share since Thursday's close -- for a cumulative market cap decline of about 1.03 billion.

Surely that reflects the 38 percent premium Air Products has offered to pay for Airgas? Not exactly: the net present value of the $250 million in cost savings that Air Products promises is more than enough to offset the entire premium -- and then some.

So the decline in Air Products reflects its owners' expectations of how much more it will need to pay to successfully buy Airgas. Divide the decline in Air Products by the number of Airgas shares (82.1 million) and it seems the larger company's shareholders anticipate it will need to pay another $12.50 a share to seal the deal.

That's a big premium to the $60 on offer, which Deutsche Bank already reckons doesn't meet Air Products' 9 percent weighted average cost of capital. And it would represent a hefty 66 percent premium to Airgas' undisturbed value.

True, Airgas is expected to put up a fight. But a white knight bidder looks unlikely. Rival Praxair (PX.N) already has a 15 percent market share in packaged gas. Neither Air Liquide (AIRP.PA) of France nor Germany's Linde (LING.DE) has beefy enough U.S. operations to squeeze out sufficient synergies to make the deal pay off.

Moreover, Airgas shareholders don't seem quite as ebullient as Air Products' slide would suggest. The stock trades less than $1 above the bid. That means Air Products will need to pay more. But with the punishing it's already received, any price below $72.50 or so a share could actually be a bonus for its wounded shareholders.

CONTEXT NEWS

-- Shares in Air Products, the industrial gas company, have fallen from $73.69 to $68.90 since the company went public with its $5.1 billion all-cash unsolicited bid for Airgas on Feb. 5.

-- Air Products said that acquisition would enable the company to strip $250 million from costs. Airgas' management has rejected the offer.

-- For previous columns, Reuters customers can click on [SWANN/]

(Editing by Rob Cox and Martin Langfield)