It seems likes a deal is going to be worked out between these two companies..
but first, the backstory:
In the past year, Airgas (ARG) has been playing the victim of an unwelcome takeover bid by Air Products (APD). It all started with APD making a bid of $60 cash per share back in February. The bid was rejected as insufficient and opportunistic. Airgas was trading at $43.53 the day before, but had traded as high as $62 prior to the Oct. 2008 market crash and had continued to generate strong earnings and growth throughout.
After being turned away, Air Products raised their bid, first to $63.50, then to $65.50. Each time, the Airgas Board of Directors rejected the price. Perhaps more infuriatingly, they also refused to let their shareholders tender. Being that this is a hostile takeover, Airgas’s board’s consent is crucial to the deal. The company has a poison-pill provision, which makes a direct-to-shareholder solicitation more costly due to a rights plan.
As a scorned suitor, but viewing their offer as fair, Air Products decided to support three nominees for the Board of Directors of Airgas, to gain a measure of control. These were successfully elected in June. However, ARG has a staggered term policy, and it would take another full year to have a majority Board position.
Thus Air Products took another step by initiating a court case to review – and they hope remove – the poison-pill blockage. Effectively, they want to let Airgas shareholders make up their own minds.
It was the belief at this time, at least publicly, that most shareholders would support negotiations and the Airgas Board was not acting in the majority interest.
The goal of these actions was for Airgas to finally come to the negotiating table. Eventually, Airgas did, and they replied with a valuation of their own, a hearty $78 per share.
Air Products rejected that as too high.
This week, the company issued its final and best offer price of $70, with a mid-January deadline. Airgas’s share price dropped on the news, as the real possibility of APD walking away surfaced.
Presently: Airgas’s Board is reviewing the new offer and has not yet reacted. They have hired investment banks to consult on their valuation.
Also, there is a decision pending in the court case re: the shareholder rights plan.
Whew! That should cover most of the history.
Now, as an investor looking at this deal, I believe there are two positive situations here:
1. While there are many rules in life, to win in negotiating, rule #1 is this: Always appear ready to walk away. That is how you get the best deal.
For months and months, it appeared that Airgas was simply not interested at all, and the deal kept getting better. From a $60 to $70 bid, this negotiating tactic earned the shareholders $840 million dollars extra.
A second, less rigid, negotiating tactic is: to close a deal, you must to appear to let the other side win.
Once Airgas finally admitted their internal valuation at $78, and considering the original price of $60, Air Products effectively has “let them win” by offering greater than 50% of the difference with this final offer.
2. Immediately following the $70 revised offer, an institutional shareholder with 6.1% of the company issued an open letter to the Airgas Board advising them to start listening to offers. This joined a previous open letter issued by a 1.8% shareholder.
There is now public pressure.
Capital management firms are notoriously private – just visit their websites — and with two of them speaking out, one can only imagine the behind-the-scenes uproar taking place from the other major holders.
It appears the time for real negotiations has arrived.
I believe the board has done a good job of maximizing shareholder value.
Do they want more? Of course they do.
But the bigger question is: If they block the deal – ie. do not pursue negotiations in good faith – are they willing to take the blame as the share price falls?
With the offer price now at a happy medium and pressure from shareholders, in my opinion, there is a much-greater-than 50% chance of a deal for Airgas.
Airgas closed Friday at $63.50.
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