(The authors are Reuters Breakingviews columnists. The opinions
expressed are their own.)
By Christopher Swann and Jeffrey Goldfarb
NEW YORK, Aug 27 (Reuters Breakingviews) - 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 (JCP.N) underscores that retail just isn't his
thing. A big bet on $22 billion Air Products and Chemicals
(APD.N) represents a second foray into heavier production for
the Pershing Square Capital Management founder, after Canadian
Pacific (CP.TO). 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 ARG.N 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 (PX.N). 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
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
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- The hedge fund run by Bill Ackman said on Aug. 27 that the
39.1 million shares in J.C. Penney it is selling priced at
$12.90 apiece, in a fully underwritten offering by Citigroup.
The sale represents a complete exit by Pershing Square Capital
Management from the retail chain, after a failed three-year
- In a letter to investors on Aug. 20, Ackman said he was in
talks with Air Products and Chemicals to reorganize the
business. His firm announced on July 31 it had acquired a 9.8
percent stake in Air Products. It started buying shares in late
May, according to documents submitted to securities regulators.
- "The company benefits from long-term secular demand growth
for its products and services," Ackman wrote. "In addition to
growth from existing in-place assets, the company has a large
opportunity to deploy growth capital in its core business at
attractive rates of return."
- Pershing Square letter to investors: link.reuters.com/fer52v
Ackman turns back on J.C. Penney, sells entire stake in
Ackman acknowledges retail blunders, digs in on Herbalife
Picking battles [ID:nL2N0GD0PD]
Target practice [ID:nL1N0FF1AI]
Call him Ahab [ID:nL2N0CW1WF]
- For previous columns, Reuters customers can click on
[SWANN/] and [GOLDFARB/]
(Editing by Jeffrey Goldfarb and Martin Langfield)
Keywords: BREAKINGVIEWS AIRPRODUCTS/ACKMAN
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