Is Bill Ackman Planning to Target Air Products?
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Shares of Air Products & Chemicals (NYSE: APD) soared on Thursday after the company’s board adopted a poison pill. Noting unusual activity in its shares, the firm undertook the measure to ward off a potential activist or acquirer.
Activist investor Bill Ackman has been raising funds to target an American company, and it’s possible that it could be Air Products -- it seems to fit his criteria. If that’s the case, it will affect the company’s shareholders, not to mention the shareholders of FedEx (NYSE: FDX) and ADT (NYSE: ADT).
Early in July, Ackman started raising funds for an activist stake in a large American company. He described its business as simple and predictable, with high barriers to entry and switching costs. It’s also free cash flow generative, and trades at a discount to its competition.
At the same time, because Ackman is said to be looking to put $3 billion into the company, its market cap must be in the range of $10 billion-$50 billion.
Air Products fits most of this criteria. As its name suggests, its business model is primarily focused on supplying industrial gases -- it’s the world’s largest supplier of hydrogen and helium, for example. It owns foreign subsidiaries, but these too are primarily focused around supplying industrial gasses.
Last year, it bought a majority stake in Chile’s Indura -- itself a major supplier of industrial gases in Latin America.
Air Products is free cash flow positive, and yields nearly 3%. It signs contracts with some of its customers, although whether it has “high” switching costs or not is debatable.
Its chief rivals are Praxair and Airgas (which it tried and failed to acquire two years ago). Air Products trades with a price-to-earnings ratio of just under 19, whereas Praxair and Airgas trade with multiples of 21.4 and 23, respectively, meaning that it does trade at a discount to its competition.
Finally, given that its market cap is just over $21 billion, a $3 billion investment would net Ackman a greater than 14% stake -- enough to shake things up.
What could Ackman do with Air Products?
It isn't readily apparent what an activist would do with Air Products. The company’s shares have actually been performing fairly well. Even excluding the recent run up in the past month, shares are still up nearly 16% in the prior year -- slightly less than broader S&P 500, but still not a bad return.
If Ackman (or another activist) was going after the company, perhaps it could be to steward the company in its turnaround efforts. Management admitted on the last earnings call that it is “assessing additional actions we can take that would result in improved margins and returns.”
As a result of that restructuring, the company said it would take a charge of $0.30-0.50 per share in fourth quarter, but that cost savings would be apparent next year.
Could the poison pill thwart an activist?
The newly adopted poison pill should make it more difficult -- but not impossible -- for an activist to take control of Air Products. Ackman’s railroad target Canadian Pacific also had a poison pill, but Ackman was still able to prevail.
It came down to a proxy contest -- one Ackman won. But in that case, Canadian Pacific’s shareholders were instrumental, siding with Ackman against the company’s management after years of underperformance.
FedEx and ADT shareholders could be disappointed
Anyone who bought a stake in FedEx or ADT in recent weeks could be disappointed if Ackman targets Air Products instead of those companies. As I wrote previously, shares of both firms soared when investors speculated that Ackman could be targeting those firms.
If he’s not, shares of both companies should be expected to fall. Since July 8, both FedEx and ADT are up more than 4%, with gains largely coming on or shortly after July 9 (when Ackman was first reported to be interested in targeting a new company).
Of course, such an outcome would highlight the danger of buying stock in a company just because it’s rumored to be the target of an activist investor.
FedEx and ADT also seem to fit Ackman’s criteria. Both firms are relatively large and are involved in singular business models. In their industries, there are barriers to entry, and long-term contracts create switching costs. Both are free cash flow generative.
FedEx trades at a discount to its biggest competitor, UPS. But, ADT’s competition is mostly made up of private companies, so it would be harder to argue that it's trading at a discount to its rivals.
Nevertheless, Ackman is only targeting one company -- not three. Assuming that his target is one of the aforementioned companies (a big assumption), speculators who backed the other two will be disappointed when his target is finally revealed.
Investing in Air Products
If Air Products is revealed as Ackman’s target, then (at least in the short-run) investors could profit when he finally comes public with his stake.
However, speculators buying in simply in the hopes of front-running an activist are taking a big risk. If it turns out that Ackman is targeting a different company, shares could tumble, and anyone who bought in attempting to make a quick buck will be burned.
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