* Near-term growth headwinds but rising capital discipline should drive FCF growth
* Cost optimisation the key focus area as companies look to emulate Air Products’ success, while a Linde-Praxair combination, if talks resumed, would have strategic merit but also significant uncertainties
* Our preferred name in the global industrial gas space is Air Liquide, initiating at Buy
Consolidation as a strategic response
A weak growth environment and Air Products’ success in eliminating overheads have rekindled interest in sector consolidation. Linde and Praxair recently (12 September 2016) broke off merger talks, but the CEO of Praxair has publicly left the door open to resuming discussions (Source: Praxair’s Q3 2016 conference call, 27 October 2016) and, in our view, such a combination, if talks were to resume and be successful, would have significant strategic merit on our scenario analysis. We estimate the potential earnings accretion from replicating APD-like cost cuts on the combined asset base of the two companies suggests such a combination is
likely to remain at the top of mind for investors for the foreseeable future.