[M&A Insights] Air Products Korea Up for Sale... Major Players Eyeing the Industrial Gas Market

No. 2 Domestic Industrial Gas Company
"M&A Valuation 5 Trillion Won" Forecast
'Oligopoly Structure' Industrial Gas Market
Increasing Interest from Private Equity and Large Corporations

Semiconductors, electronics, displays, petrochemicals, steel, automobiles, and other core industries in South Korea rely heavily on 'industrial gases.' Domestic industrial gas companies refine and supply nitrogen, oxygen, argon, hydrogen, and more to major conglomerate factories and industrial complexes. The importance of these gases is increasing daily, as even a single day of supply interruption can halt the entire production of large corporations.

Recently, the merger and acquisition (M&A) market has been buzzing with news that Air Products Korea, the second-largest player in the domestic industrial gas market, is up for sale. According to investment banking (IB) industry sources on the 12th, Air Products has appointed Citigroup Global Markets Securities as the lead advisor for the sale and decided to sell 100% of Air Products Korea's shares. The sale process is expected to be completed within this year, with valuations already being discussed in the trillions of Korean won. In this M&A insight, we will comprehensively analyze Air Products Korea's corporate value along with the current status of the domestic industrial gas market.

Operating Profit Margin Near 20%... Valuation Expected Between 2 to 5 Trillion KRW

Air Products Korea originated as Korea Gas Industry, established in 1973. The company changed its name to Korea Gas Industry in 1994 and became a 100% subsidiary of the global industrial gas company Air Products in 1999. It adopted its current name in 2007. In 2016, the company split into two: Versum Materials Korea took charge of the specialty gases segment, while Air Products Korea focused on industrial gases.

Air Products Korea is regarded as a 'cash cow' company with an operating profit margin close to 20%. The company closes its fiscal year every September, and for the last fiscal year (October 2022 to September 2023), it recorded sales of 765.1 billion KRW and operating profit of 136.6 billion KRW. Net income after deducting taxes and other expenses from operating profit was approximately 117.8 billion KRW. The current shareholding structure is Air Products International 41.63%, Air Products 33.9%, Air Products Manufacturing Corporation 24.51%, and treasury stock 0.01%.

The market expects Air Products Korea's valuation to exceed 2 trillion KRW. Applying a 10x multiple to last year's EBITDA of 232.8 billion KRW estimates a price around 2.3 trillion KRW. Some speculate that considering M&A cases of similar companies, a 20x multiple could be applied, pushing the expected sale price to about 5 trillion KRW. Previously, IMM PE applied a multiple of approximately 27x when acquiring 100% of Air First, an industrial gas company, for around 1.2 trillion KRW.

Private Equity Firms Increasing Acquisitions of Domestic Industrial Gas Companies

Accordingly, not only large private equity (PE) firms but also major corporations in related industries are showing interest in Air Products Korea, which is now on the market. Leading domestic and international PE firms such as MBK Partners, KKR, and Han & Company PEF are considered potential bidders.

Above all, since the industrial gas market is an oligopoly dominated by a few companies both domestically and internationally, acquiring Air Products is expected to generate stable profits. In South Korea, the market is dominated by about five to six companies, including Linde Korea, the market leader, Air Products Korea, DIG Air Gas, and Air First. Large corporations that receive industrial gases tend to sign long-term supply contracts or renew contracts upon expiration to minimize costs associated with switching suppliers. Due to the large capital investment required for plant facilities and strict regulations, it is difficult for new entrants to enter the market.

Lee Dong-wook, a researcher at IBK Investment & Securities, said, "Recently, private equity firms' acquisitions of domestic industrial gas companies have been on the rise. Generally, industrial gases involve exclusive contracts lasting over 20 years through factories and pipelines. Such infrastructure-type assets are not significantly affected by macroeconomic factors, and predictable cash flows allow for stable dividend policies."

Industrial gases are considered a business with steady profitability because they involve long-term supply contracts using major factories and facilities, making them less sensitive to macroeconomic trends. Demand is expected to increase further with the expansion of the battery materials industry. POSCO Group has also been actively pursuing related businesses early on and is expected to be proactive in this acquisition battle. Since 2021, POSCO has been accelerating new businesses utilizing industrial gases produced at its steel mill oxygen plants.

An IB industry insider explained, "Industrial gases are indispensable products in various manufacturing processes, and with future technological development and strengthened decarbonization trends, the potential uses of industrial gases, including hydrogen, will expand further. Because profitability is consistently guaranteed, private equity firms inevitably maintain steady interest in M&A."