Industrialist hat suits Bill Ackman better

August 27, 2013

By Christopher Swann and Jeffrey Goldfarb
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

Industrialist Bill Ackman is more persuasive than shopkeeper Bill Ackman. The uppity investor’s exit this week from a disastrous investment in J.C. Penney underscores that retail just isn’t his thing. A big bet on $22 billion Air Products and Chemicals represents a second foray into heavier production for the Pershing Square Capital Management founder, after Canadian Pacific. As at the railway, better management could go a long way at the gas producer.

Not much has gone well for Air Products since John McGlade became chief executive in October 2007. Though it has kept pace with some competitors on an operating basis, its shares declined by 4 percent between then and when Ackman started accumulating his 9.8 percent stake in late May. Those of each of its four closest peers were up by at least 38 percent over the same span. Airgas’s doubled. A badly botched attempt to buy that smaller rival cost Air Products $150 million and over a year’s worth of management distraction.

Between 2008 and 2012, Air Products invested $6 billion to build, buy or upgrade plants and equipment. It has growth of earnings before interest and taxes of just 3 percent to show for it. Project delays restrained return on capital employed to 11.5 percent last year, compared to 14 percent for industry leader Praxair. A misguided focus on the lower-margin electronics sector also hurt.

The response by McGlade and his board has been to dig in, resisting shareholder efforts to put the entire board up for election at once and implementing a poison pill. If Ackman can break through, there may be plenty of upside. At Canadian Pacific, he won a proxy fight and installed a new CEO and directors. The operating margin has climbed 4 percentage points and the share price tripled since Ackman first invested in September 2011.

Air Products is expected by analysts to generate $11.6 billion of revenue by 2015. If it could match Praxair’s 23 percent EBIT margin and fetch a slightly higher multiple of earnings, it would translate into a 75 percent increase in the share price. Offload some businesses and acquire others – perhaps even Airgas – and there may be a path to a doubling.

A lot has to go right, though. Ackman probably will first need to win another proxy battle. His chosen CEO would then have to make big changes at Air Products. At least industrial gas is an oligopoly selling substances essential to certain industries. That should mean that despite the combustible nature of the product, even if Ackman fails, the investment won’t blow up in his face.

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