D.E. Shaw, Mantle Ridge zero in on key fixes to build shareholder value at Air Products

Business: Air Products and Chemicals is an concern gases company. It's focused connected serving energy, biology and emerging markets. Its basal concern provides indispensable concern gases, related instrumentality and applications expertise to customers successful dozens of industries, including refining, chemicals, metals, electronics, manufacturing and food. Air Products besides develops, engineers, builds, owns and operates cleanable hydrogen projects supporting the modulation to low- and zero-carbon vigor successful the heavy-duty proscription and concern sectors. In addition, it provides turbomachinery, membrane systems and cryogenic containers globally. Air Products has operations successful astir 50 countries.

Stock Market Value: $73.83B ($332.10 per share)

Air Products and Chemicals successful 2024

Percentage Ownership: n/a

Average Cost: n/a

Activist Commentary: D.E. Shaw is simply a ample multi-strategy money that is not historically known for activism. The steadfast isn't an activistic investor, but it uses activism arsenic an opportunistic instrumentality successful situations wherever it thinks it whitethorn beryllium useful. D.E. Shaw seeks retired coagulated businesses successful bully industries, and if the steadfast identifies underperformance that is wrong management's control, it volition instrumentality an progressive role. The capitalist places a premium connected private, constructive engagement with management. As a result, it often comes to an statement with the institution earlier its presumption is adjacent public.

Air Products provides concern gases and related instrumentality successful end-markets specified arsenic refining, chemicals, metals, electronics, manufacturing and food. The company's concern state concern is highly unchangeable and debased risk, functionally a risk-free, inflation-protected, elder secured enslaved erstwhile the concern is kept pure. The quality of the concern is that the institution enters into semipermanent 15- to 20-year "take oregon pay" contracts with customers that person precise precocious renewal rates exceeding 95%. The concern is fundamentally immune to economical cycles, contracts are inflation-protected, and the oligopolistic manufacture has immense barriers to entry. These semipermanent contracts functionally warrant an unlevered double-digit instrumentality earlier Air Products adjacent needs to enactment a dollar into the ground. When unadulterated and committed purely to its halfway business, this is simply a fantastically unchangeable and well-valued enterprise.

However, portion the institution was focused connected its ain operations, it missed retired connected a question of consolidation successful the industry. In 2016, Air Liquide finalized its purchase of Airgas. In 2018, Linde and Praxair completed a merger of equals. Before Air Products knew it, the institution was the unusual antheral standing, and it was lasting each alone. CEO Seifi Ghasemi's enlargement solution, having missed retired connected combinations with pure-play peers, has been to prosecute non-core concern expansion. Departing from its longstanding strategy successful the accepted concern state concern exemplary that generates dependable superior returns, the institution has moved up on the hazard curve towards much speculative investments without locked-in gross done respective cleanable hydrogen task investments. Across 5 investments — the astir notable of which being the Air Products' NEOM Saudi Arabia green hydrogen project and its Louisiana blue hydrogen project — the institution expects to walk astir $12 cardinal of capex. When initially planned, Air Products did not person offtake agreements — agreements with buyers to acquisition its aboriginal offerings — for 4 of the 5 projects (only 6% of capableness had offtake agreements). Today, implicit 80% of task capableness remains uncontracted.

This is simply a cleanable illustration of "di-worsification." Investors admit companies similar Air Products for their low-risk and highly unchangeable cash-flowing operations. Regardless of the efficacy of these non-core businesses, the emblematic risk-averse investors that person been historically attracted to companies similar Air Products are going to fly erstwhile the hazard illustration changes. Moreover, investors with a larger appetite for hazard who mightiness beryllium attracted to businesses similar NEOM oregon the Louisiana project, are little apt to put successful it erstwhile it is diluted by a low-risk, unchangeable concern similar Air Products' halfway concern state businesses. Further, matters are not helped by the information that peers Linde and Air Liquide person been capable to execute connected hydrogen projects with secured offtake agreements successful spot pre-construction and person focused connected partnerships successful enactment with its low-risk accepted concern model.

As a effect of its concern successful these speculative projects, Air Products' capex arsenic a percent of income has much than doubled implicit the past 5 years and is astir four-times higher than its adjacent average. The company's escaped currency travel conversion has turned antagonistic whereas peers are averaging 92% since 2016. Further, its instrumentality connected superior employed is moving inversely compared to peers. While absorption thinks that being a archetypal mover successful greenish and bluish hydrogen and moving up the hazard curve should beryllium rewarded with a higher aggregate and banal price, investors intelligibly disagree. Air Products has underperformed its peers and applicable benchmarks implicit functionally each applicable clip framework successful the past 10 years and is trading astatine a 20% discount.

Now, D.E. Shaw has taken an approximate $1 cardinal involvement successful Air Products and has taken its engagement nationalist aft initially reaching retired to the institution implicit a period agone and presenting its value-enhancing program to management connected Oct. 2. D.E. Shaw volition typically spell nationalist with a run aft a solution has been reached with the company, but the steadfast has encountered immoderate absorption to engagement here. It enactment guardant a seven-point program to amended worth astatine the company, focused connected a revised superior allocation model and firm governance. Beginning with superior allocation, D.E. Shaw is urging the institution to de-risk its existing ample task commitments by signing offtake agreements astatine tenable instrumentality hurdles, arsenic their peers person been capable to do. In addition, successful airy of Air Products finalizing different ample hydrogen task successful Texas without existing offtake agreements successful place, the steadfast demands that the institution perpetrate to tying aboriginal superior concern to offtake statement milestones. Furthermore, D.E. Shaw wants the institution to bounds yearly capex to $2 cardinal to $2.5 cardinal beyond 2026, with a circumstantial people of capex to not transcend the mid-teens arsenic a percent of Air Products' revenue. The steadfast besides argues that the institution should instantly repurchase its discounted shares up to its three-times people nett leverage ratio successful fiscal twelvemonth 2025 and nonstop aboriginal excess escaped currency toward further repurchases.

The 2nd portion of D.E. Shaw's run pertains to firm governance, successful particular, succession readying for CEO Seifi Ghasemi. At astir 80 years old, helium has been serving successful the relation for a decade. Ghasemi was fixed a five-year extension successful 2020 and it was renewed successful 2023 connected an evergreen basis. There appears to beryllium nary ceremonial succession program successful place, lone vague commitments to a hunt for an experienced erstwhile CEO of a nationalist company. Air Products' COO Samir Serhan officially left the company astatine the extremity of September, removing a prime interior candidate. There are questions astir what viable campaigner would privation to articulation the institution if Ghasemi fundamentally has an indefinite contract. Not to mention, his compensation implicit the past 5 years of $87 cardinal is acold greater than some the company's adjacent mean ($78.5 million) and S&P 500 mean ($67.2 million), contempt underperforming both. D.E. Shaw is demanding that the institution pass a clear, credible, and transparent CEO succession plan. It wants the institution to refresh the committee with highly qualified autarkic directors, and to restructure enforcement compensation to amended alignment with strategy and show (i.e. the instauration of instrumentality connected equity/return connected superior employed metrics for the semipermanent inducement program arsenic peers have). The steadfast is besides calling for the enactment of 1 oregon much advertisement hoc committee committees to oversee these initiatives.

D.E. Shaw is simply a ample multi-strategy money that is progressively embracing activism arsenic a instrumentality to make shareholder worth and has an experienced squad that has had occurrence successful its activistic engagements. Since the opening of 2022, it has commenced six activistic campaigns, settling for committee seats successful 5 (L3Harris Technologies, Corpay, Fidelity National Information Services, FedEx and Verisk Analytics) and successfully opposing a merger astatine the sixth (Diversified Healthcare Trust). The steadfast is known for its heavy quantitative and method research. This is exemplified successful its Oct. 2 presumption connected Air Products. D.E. Shaw thoroughly outlines the company's issues and offers projected fixes.

It is not uncommon to spot aggregate activists successful the aforesaid stock, particularly astatine a institution with specified a beardown underlying concern paired with comparative underperformance, superior allocation missteps and firm governance reddish flags. On Oct. 4, Mantle Ridge announced a much than $1 cardinal presumption successful Air Products, and echoed a akin sentiment and identified akin issues arsenic D.E. Shaw. The main quality betwixt the 2 is that D.E. Shaw historically adds a number of directors to the committee and mostly not a main of the firm. Mantle Ridge has historically reconstituted a bulk of boards with the inclusion of its founder, Paul Hilal. While definite investors and CEOs whitethorn look astatine the activistic main being connected the committee arsenic a negative, we spot it a important affirmative successful that it signals semipermanent engagement, and the activistic capitalist is often the astir prepared and assertive autarkic manager astatine committee meetings. It should besides beryllium noted that successful 3 anterior campaigns, Mantle Ridge ne'er placed much than 1 of its ain insiders connected the board, and the steadfast ever had a slate of impressive, autarkic directors.

D.E. Shaw is lone seeking 3 seats connected Air Products' nine-person board, including 1 for Scott Sutton, the erstwhile CEO of Olin, who oversaw a banal appreciation of 379.2% arsenic CEO from Sept. 1, 2020 to March 18, 2024, versus 28.3% for the Russell 2000 implicit the aforesaid period. The 2 others volition apt beryllium awesome nationalist institution executives with a way grounds of creating shareholder value. While D.E. Shaw's concern thesis has plentifulness of overlap with Mantle Ridge's plan, determination are 2 glaring issues that some investors prioritize: CEO succession readying and superior allocation refocus. We powerfully expect that galore of Air Products' different shareholders are acrophobic astir the aforesaid issue. So, the question present is not whether determination volition beryllium change, but what volition that look like. Having 2 antithetic activists gives the institution immoderate optionality to settee with the 1 it thinks volition beryllium a amended fit. D.E. Shaw apt means less caller directors and nary activistic principal. But Mantle Ridge has a pre-existing narration with the company, arsenic good arsenic immoderate of the existent directors and CEO Ghasemi, going backmost much than 10 years, and it has a estimation of moving good with management. As some activists volition importune connected amended superior allocation and a steadfast succession plan, either mode it should beryllium a triumph for shareholders.

Ken Squire is the laminitis and president of 13D Monitor, an organization probe work connected shareholder activism, and the laminitis and portfolio manager of the 13D Activist Fund, a communal money that invests successful a portfolio of activistic 13D investments.