INSIGHT: Linde sees growth synergies

25 March 2008 17:33  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--A strong set of financial results from Germany’s Linde illustrates the fact that the major industrial gases players are still on something of a roll.

Linde chose the right time to absorb UK-based BOC, the deal completed in March 2007. It paid a lot for the privilege but a strong cashflow last year helped ease the burden. Now its near-term financial targets look almost easily achievable.

But longer term, what sort of restructuring might the company have to undergo to perhaps focus further and keep adding that always sought-after premium on growth?

The big gas makers have benefited from strong demand almost across the board and are likely to be only marginally disturbed by a slowdown brought about by the global credit crisis.

They are diversified and possibly widespread enough geographically to weather most of what that this particular storm can throw at them.

Linde CEO Wolfgang Reitzle was upbeat at the time of the annual results talking of sales growth sales growth in 2008 and a faster earnings increase.

"We confirm our medium-term objective and are seeking to achieve a group operating profit of more than €3bn for the 2010 financial year,” he said.

“In terms of ROCE (return on capital employed), our key performance measure, we want to achieve at least 13% in 2010," he added.

The company expects the industrial gases industry to grow at 7% on average over the next few years. But Linde appears to have the momentum to grow faster than the market.

So far Linde’s businesses are unaffected by the credit turmoil. Its growth projections may not be spectacular but they are realistic and illustrate the relative stability of industrial gases sales.

Since taking over BOC, Linde has achieved double digit profits growth in both its gases and engineering divisions.

It achieved a target ROCE in 2007 a year ahead of schedule following the deal. Critically it has driven net debt down substantially from the acquisition peak and ahead of expectations to €6.4bn.

And there is more to come with further acquisition-driven consolidations contributing more strongly to the bottom line.

Linde is still seeing strong demand from Asia and the Middle East in its major markets. It is the global leader in the global bulk and cylinder gases markets and is certain it can drive industrial gases growth above that of GDP.

The question marks, however, hover over the company’s engineering business.

There are synergies between gases and engineering and the Linde engineering business is becoming more global. Currently, it is doing well with 48 major plants due for start-up between 2008 and 2010.

Reitzle also talks of potential from the developing alternative energy markets and processes such as gas-to-liquids (GTL) and alternative fuels.

Yet Linde has been questioned about the long term links between the two.

Some commentators recognise the fundamental differences between engineering and industrial gases. An engineering business may be nice to have but does it confer additional and sustainable growth to industrial gases, the thinking goes.

The synergies work at a time of high oil prices but Linde admits that a construction slowdown could delay some projects.

And over the longer term it can be far from certain that engineering can continue to supply industrial gases business growth when petrochemical plant construction slows and if GTL and alternative energy projects are put on hold?

Yet for Linde, the diversity engineering adds to its business portfolio is too compelling to contemplate a split.

Reitzle is certain that engineering and industrial gases give Linde real competitive advantage. “We will never think about selling this business, you can be sure,” he said at the annual results press conference.

Scenarios that highlight the continued push for alternatives in an energy-hungry world back his conviction.  

By: Nigel Davis
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