Ackman has Air Products catalyst, now for reaction

September 26, 2013

By Christopher Swann
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Activist investor Bill Ackman has quickly dislodged Air Products and Chemicals’ underperforming boss, John McGlade. The win brought him a sharp gain of $100 million on his 10 percent holding in the natural gas firm as investors initially reacted to the news. For bigger, more lasting success, however, a painstaking transformation of the company is now needed.

The victory comes at a good time for Ackman, whose hedge fund, Pershing Square Capital Management, recently lost more than $400 million on its stake in retailer J.C. Penney. The $2.2 billion Air Products bet, the fund’s largest to date, is already paying dividends. Announced in late July, the investment is up some $250 million.

Avoiding a costly battle so far is an unexpected bonus. Air Products first reacted to Ackman’s interest by installing a poison pill, often the prelude to a prolonged fight. What’s more, a third of the company’s directors have served for a decade or more, creating the possibility that Ackman would have had to dislodge an entrenched board.

Removing McGlade is an important first step. The value of Air Products shares fell 4 percent during the period between McGlade’s appointment in October 2007 and the hedge fund manager’s initial investment. Shares of the company’s four largest rivals, meanwhile, increased in price by at least 38 percent.

The goal now is for a dramatic improvement in the company’s underlying business. Air Products currently extracts an EBIT margin of just 15 percent, far below the approximately 23 percent of industry leader Praxair. With the company expected to generate $11.6 billion of revenue by 2015, Air Products would need to match Praxair’s EBIT margin and attract a slightly higher multiple to get a 75 percent stock price boost. That would allow Ackman to double his investment, a reasonable outcome for such a large bet.

A good strategy could be to try and pry away Praxair Chief Financial Officer James Sawyer, who gets much of the credit for his company’s recent success. With heavy exposure in Europe and many clients in the cyclical electronics sector, however, Air Products won’t find a turnaround easy, even with top rate management. For Ackman and the company, there’s still plenty of work to do.


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