Highly controversial activist-investor Bill Ackman is at it again, this time with the largest single investment his firm has ever made. Taking a near 10%, $2 billion position in Air Products & Chemicals (APD +1.26%), Ackman is following his strategy of encouraging management-level change in a relatively simple, easy-to-understand firm that has lagged in stock price growth due to issues within the company itself. Though recently more known for his struggling investments than his winning ones, Ackman still holds a position as one of the nation's elite investors. The question is, can he convince the shareholders of Air Products & Chemicals, a company with a tremendous track record of dividend growth, to rally behind him and demand change?
The business
Air Products & Chemicals is an industrial gas manufacturer supplying its products to a variety of industries -- from tech and energy, to health care. Though not necessarily an underperformer, given that its stock is pushing through 52-week (and now all-time) highs, the company has increased its dividend consecutively for 30 years, and has cut more than $150 million in costs recently. Air Products is considered undervalued, with substantial potential for capital appreciation -- at least Ackman thinks so.
In his firm's statement, the investor says that the stock is an attractive investment, and that Pershing (his fund) may engage in discussions with management regarding "governance, board composition, management, operations, business, assets, capitalization, financial conditions, strategic plans, and the future of the issuer." Basically, Pershing is leaving the door wide open as to its pending involvement with the company.
Air Products is far from suffering, but management must have anticipated activist interest, as just last week, it used a version of a poison pill tactic -- flooding the market with preferred share rights for every common share outstanding in order to prevent any individual investor from gaining too big a position. Such a maneuver is a strong signal that management is nervous and protecting their own interests, as it dilutes the holdings of all previous investors, at least in the short term.http://www.airproducts.com/company/news-center/2013/07/0725-air-products-adopts-stockholder-rights-plan.aspx
The stock has lagged the S&P 500 since its recession lows, but, as mentioned, holds court as dividend royalty, which is likely its biggest appeal to investors. So will Ackman be able to gain influence?
Anything's possible
Ackman has been able to gain influence in plenty of his previous activist stakes, and not all were troubled companies to begin with. Though Herbalife and J.C. Penney have been two heavily publicized, troubled bets for the mega investor, his positions in companies such as Canadian Pacific Railroad, Fortune Brands (now split into Beam and Fortune Brands Home and Security), and Burger King have resulted in strong returns after management ousters (in the case of CPR), spin offs (FBHS), and restructurings (BK). Ackman certainly has the ability to extract value out of seemingly well-run businesses.
The biggest challenge will be to convince the dividend-loving investors that something needs to change at the Allentown, PA headquarters of Air Products & Chemicals. Given that institutional investors own 86% of the company, Ackman's success will ride on his ability to gain support. Pershing's release mentioned the possible use of proxies as a catalyst for change.
As investors, once again, take the activist ride with Ackman and Air Products, keep a close eye on the investor's specific criticisms and plans for change. The company has already acted defensively, which may herald more clashes to come. Given the extreme coverage Ackman's investments receive, there will likely be higher than average activity in the stock.
