Linde/Praxair: Helium divest packages could vary by geography
- US refinery sale seen quick fix
- European supply contracts sales may be harder to execute
- Value of contracts likely higher than refinery disposal
The nature of helium divestitures in Linde [ETR:LIN] and Praxair’s [NYSE:PX] proposed merger could vary by geography, said a third party source, a source familiar with the matter and two competition lawyers.
In the US, a potential divestiture of one of the parties’ helium refineries is an obvious solution given the gas supply chain, the sources and two lawyers said. In Europe, however, the parties’ lack of refineries could make helium supply contracts a more logical remedy, the sources and the first lawyer said.
News reports indicated the parties could expect to divest more assets than expected after Linde
announced last week that the deal’s regulatory clearance could “be subject to requirements more onerous than previously assumed.” Divestitures could now hit EUR 800m in EBITDA, it was reported. This is still below the parties' commitments to divest assets worth up to EUR 3.7bn in revenue and EUR 1.1bn in EBITDA to close the transaction.
Brazilian, European and US antitrust authorities are reviewing the merger along with agencies in several other jurisdictions.
US helium divestitures
The merging parties have a relatively simple path to resolving helium business overlap should regulators focus on refining versus extraction in the US, the third party source said. A divestiture of one of the parties’ US refineries could substantially remedy potential concerns given the current four-refinery market dynamic, this source and the first lawyer said.
The helium refinery market in the US is concentrated, with
Air Products [NYSE:APD], Praxair, Linde, and
KeyesHelium owning
major refineries that convert crude helium gas into byproducts. Three of the refineries do far more business than the fourth, the third party source cautioned.
Gas is extracted on land operated by the US’ Bureau of Land Management (BLM), and sold to these refineries concentrated near the BLM’s Hugoton-Panhandle complex in Texas.
The refineries account for a significant proportion of refined helium in a market the European Commission (EC) has previously
defined as worldwide in wholesale and national in retail. As of 2008, plants connected to the US Bureau of Land Management’s crude helium extraction system
accountedfor 3.65 billion cubic feet (BcF) of refined helium per year relative to the total US production of 5.33 BcF per year. For the same period, non-US production comprising assets in Algeria, Poland, Qatar and Russia amounted to 1.86 BcF per year.
The sale of either Linde’s or Praxair’s US helium refinery could be financially feasible for the parties, the third party source said. A divestiture value could be reasonable relative to the size of Linde and Praxair’s divestiture cap, this source said, but declined to specify further.
The Federal Trade Commission (FTC) might also accept a larger pool of bidders for the helium refinery than for some other divestiture assets, said two sources briefed on the matter. A non-industrial gases strategic could be a credible bidder for the helium business providing that the company has the technological know-how and hands-on experience in a related field, such as liquefied natural gas (LNG), they said.
The universe of such buyers for the helium business could include General Electric [NYSE:GE], the sources briefed said. Both sources briefed cited GE’s large-scale LNG technologies expertise as well as its cryogenic plant design capabilities for LNG and carbon dioxide applications.
However, the source familiar said that the most logical bidder pool for a US helium refinery would be current industrial gas suppliers.
Helium contract sales
In Europe, the parties’ principal helium market overlap is in supply contracts, the source familiar said. Linde and Praxair hold the rights to helium supplies rather than ownership of refineries in Europe.
In Linde/BOC 2006, the EC noted helium wholesalers active in Europe sourced the gas from deposits in Poland, Russia, Algeria, Qatar, and the US. The EC found that existing long-term contract supplier BOC’s combination with ‘maverick’ new entrant Linde would reduce the incentive for price competition and “raise the risk of tacit collusion” among the resulting four industry participants.
The parties have helium supply contracts with customers that could be difficult to transfer, the third party source said. Potential buyers might not want the political risk attached to exposure to some of the producing countries’ governments, while integrated contract schemes themselves can be very difficult to disentangle in time for a sale, he said.
In
Linde/BOC, for instance, two possible contract remedies for the helium market were tabled. The first proposal was dropped given negative
feedback about whether the proposed divestiture would be sold in time. But, the EC ultimately accepted an alternative remedy package containing two specific Linde and three specific BOC helium supply contracts with a larger combined volume than the initial remedy proposal. Assets and customer contracts were added to the package as well, because a market test indicated they were also needed for the remedy's viability.
Linde/BOC was cleared in Phase I of the EC’s merger review.
Helium contracts are often sold back to back as they roll off, the source familiar said. That makes the kind of contract sale that could be required by regulators a fairly standard industry transaction, he and the first competition lawyer agreed.
It is unclear what the value of Linde and Praxair’s helium supply contracts is, but a sale of several contracts is likely to be far larger than the value of a refinery transaction, the third party source said.
Onsite tonnage, a bulk gas delivery method, was previously reported to be a potential sticking point with regulators given the parties’ overlapping footprints. Helium provision, however, has been treated as a distinct market by the European Commission in previous industrial gas reviews.
Linde and Praxair declined to comment.
