Industrial gas supplier Air Products and Chemicals Inc (APD.N) will buy a 67 percent stake in Chile-based Indura SA INDUR.UL for $884 million to expand in fast-growing Latin America, while reducing its exposure to Europe.
Weak economic conditions in Europe, Air Products's second-largest market, has forced the company to look at lowering its presence in the continent, which brought in 27 percent of its second-quarter sales of $2.34 billion.
The company sold its homecare business in Belgium, Germany, France, Portugal and Spain to bigger rival Linde AG (LING.DE) for $750 million earlier this year.
The investment in Indura will "position Air Products as the second-largest industrial gas producer in Latin America, a region second in growth only to Asia," Air Products said.
"We expect double-digit industrial gas market growth in Latin America," Air Products CEO John McGlade said on a conference call with analysts.
McGlade said he expects manufacturing growth rates in Latin America to remain strong over the next 10 years.
"Industrial gas consumption grows at approximately two times manufacturing growth and higher in developing regions like Latin America," McGlade said.
Santiago-based Indura is the largest independent industrial gas company in Latin America, with annual sales of $478 million, Air Products said on Tuesday.
"The valuation is 2.8 times sales. That is pretty high relative to where other gas companies trade in the industry," said Colin Isaac, an analyst at Atlantic Equities.
"The average for global gas companies is at 2.3 times sales and Air Products is 2 times sales."
Air Products Chief Financial Officer Paul Huck said the deal value "may seem high at first glance," but after-tax cash returns on the acquisition were similar to the returns Air Products earned elsewhere.
Air Products, which last year failed in its $5.9 billion hostile bid for rival Airgas Inc (ARG.N), generated less than 2 percent of its March quarter sales from Latin America.
Asia contributed 23 percent.
Indura has more than 100 retail outlets in Argentina, Chile, Colombia, Ecuador and Peru. Air Products is already present in Argentina, Brazil and Mexico.
Atlantic Equities analyst Isaac said though Latin America was not growing as fast as it was, there were prospects for growth on the medium- to longer-term basis.
The deal, expected to close by early July, will add to Air Products's earnings per share in fiscal 2013, the company said.
CFO Huck said the transaction would occur in two tranches, with the first portion closing in early July and giving Air Products a majority position.
The second tranche, which will give Air Products a 67 percent stake will close within the next year.
The Indura deal would be Air Products's biggest, according to Thomson Reuters data.
Air Products said it would fund the deal with a bridge loan at first, and with equity and corporate debt later.
Air Products, whose customers include Apple Inc (AAPL.O) and Intel Corp (INTC.O), supplies argon, oxygen and other industrial gases.
Shares of Air Products, which has a market value of $16.83 billion, were up 2 percent at $81.18 on Tuesday on the New York Stock Exchange. The stock has fallen 12 percent this year.
(Reporting by Swetha Gopinath in Bangalore; Editing by Sriraj Kalluvila)