DE Shaw and Mantle Ridge zero in on critical fixes to build Air Products shareholder value | Wilnesh News

Business: Air Products is an industrial gas company. It focuses on serving energy, environment and emerging markets. Its foundational business provides essential industrial gases, related equipment and application expertise to customers in dozens of industries including refining, chemicals, metals, electronics, manufacturing and food. Air Products also develops, designs, builds, owns and operates clean hydrogen projects that support the transition to low- and zero-carbon energy in heavy-duty transportation and industry. In addition, it supplies turbomachinery, membrane systems and cryogenic vessels worldwide. Air Products operates in approximately 50 countries.

Deshaw The Air Products board of directors has been contacted. The firm recommended that companies take a variety of steps to improve shareholder value, including improving capital allocation, refreshing boards and restructuring executive compensation.

However, while the company focused on its own operations, it missed the wave of industry consolidation. In 2016, Air Liquide complete purchase air gas. In 2018, Linde and Praxair completed a equal merge. Before Air Products knew it, the company was alone, and standing alone. CEO Seifi Ghasemi’s solution for expansion is to pursue expansion in non-core businesses, missing out on mergers with pure play peers. Unlike its long-term strategy of a traditional industrial gases business model that generates reliable capital returns, the company has moved up the risk curve by investing in several clean hydrogen projects and moving to more speculative investments without locking in revenue. Across five investments – most notably Air Products’ NEOM Saudi Arabia Green hydrogen energy project and its louisiana blue hydrogen project —The company expects to spend nearly $12 billion in capital expenditures. When originally planned, Air Products did not have offtake agreements, agreements with buyers to purchase its future production, for four of the five projects (only 6% of capacity had offtake agreements). Today, more than 80% of project capacity remains uncontracted.

This is a perfect example of “double aggravation”. Investors appreciate the low risk and highly stable cash flow operations of companies like Air Products. Regardless of the efficacy of these non-core businesses, the typically risk-averse investors who have historically been attracted to companies like Air Products will flee when the risk profile changes. Additionally, investors with a higher appetite for risk may be attracted to businesses such as NEOM or the Louisiana project, but they are not interested when those businesses are diluted by lower-risk, stable businesses such as Air Products’ core industrial gases business. Would be very likely to invest in it. It also doesn’t help that peers Linde and Air Liquide are able to enter into secured offtake agreements to execute hydrogen projects before construction and focus on partnerships that fit their traditional low-risk business models.

As a result of investments in these speculative projects, Air Products’ capital expenditures as a percentage of sales have more than doubled over the past five years and are about four times the industry average. The company’s free cash flow conversion has turned negative since 2016, compared with the industry average of 92%. While management believes that being a pioneer in green and blue hydrogen and moving up the risk curve should result in higher multiples and share price returns, investors clearly disagree. Over the past 10 years, Air Products has functionally underperformed its peers and relevant benchmarks in every relevant time frame and trades at a 20% discount.

Now, DE Shaw has acquired a stake in Air Products worth about $1 billion and has now made its involvement public after first approaching the company to introduce its partnership more than a month ago. Manage value-added programs October 2nd. It proposes a seven-point plan to improve company value, focusing on revising the capital allocation framework and corporate governance. Starting with capital allocation, DE Shaw urged the company to sign offtake agreements at reasonable return thresholds to de-risk its existing large project commitments, as their peers have done. Additionally, given that Air Products has finalized another large hydrogen project in Texas but has not yet entered into an existing offtake agreement, the company is asking the company to commit to tying future capital investments to offtake agreement milestones. In addition, DE Shaw wants the company to limit annual capital expenditures to $2 billion to $2.5 billion after 2026, with the specific goal of capital expenditures accounting for no more than 15% of Air Products’ revenue. It also believes the company should immediately repurchase its discounted shares until it triples its fiscal 2025 net leverage target and use excess future free cash for additional repurchases.

The second part of DE Shaw’s campaign dealt with corporate governance, specifically CEO Seifi Ghasemi’s succession plan. He is about 80 years old and has held this position for ten years. Ghasemi was awarded five-year extension In 2020 it is Updated in 2023 On an evergreen basis. There appears to be no formal succession plan, just a vague commitment to finding an experienced former public company CEO. Air Products Chief Operating Officer Samir Serhan made his official debut Leave the company At the end of September, a good internal candidate was eliminated. If Ghasemi is essentially on an indefinite contract, there are questions about which viable candidates would be willing to join the company. Not to mention, his compensation over the past five years was $87 million, well above the company’s peer average ($78.5 million) and the S&P 500 average ($67.2 million), despite poor performance. DE Shaw requires companies to communicate clear, credible and transparent CEO succession plans. It wants companies to renew their boards with highly qualified independent directors and restructure executive compensation to improve alignment with strategy and performance (i.e., like peers, introduce return on equity/return on capital metrics in long-term incentive plans )). The company also called for the creation of one or more ad hoc board committees to oversee the measures.

DE Shaw is a large multi-strategy fund that is increasingly embracing activism as a tool to create shareholder value and has an experienced team with a track record of success in activist activities. Since the beginning of 2022, the company has launched six active campaigns to target 5 (L3 Harris Technologies, kope, Fidelity National Information Services, Inc.FedEx and Velisk Analysis) and successfully opposed the merger for the sixth time (Diversified Healthcare Trust). The company is known for its in-depth quantitative and technical research. The Oct. 2 presentation on Air Products reflected this. DE Shaw provided a comprehensive overview of the company’s problems and recommended fixes.

It’s not uncommon for multiple activist investors to own the same stock, especially in a company with such a strong underlying business but relatively poor performance, capital allocation misalignments and red flags in corporate governance. On Oct. 4, Mantle Ridge announced a stake in Air Products worth more than $1 billion, expressing similar sentiments and pointing to similar issues as DE Shaw. The key difference between the two is that DE Shaw has historically added a handful of directors to the board of directors, but typically not as principals of the company. Mantle Ridge has historically reorganized most of its board of directors, including its founder Paul Hilal. While some investors and CEOs may view the addition of activists to the board as a negative, we view it as a significant positive as it signals long-term involvement and activists are often the most prepared for board meetings , the most confident independent director. It should also be noted that Mantle Ridge has never had more than one insider on its board during its three previous campaigns, and the company has always had an impressive group of independent directors.

DE Shaw seeks only three seats at Air Products nine-member board of directorsThese include former Olin CEO Scott Sutton. During his tenure as CEO, his stock price rose 379.2% from September 1, 2020 to March 18, 2024, while the Russell 2000 index’s stock price rose 28.3% during the same period. The other two may be impressive public company executives with a track record of creating shareholder value. While there is much overlap between DE Shaw’s investment philosophy and Mantle Ridge’s plans, both investors prioritize two obvious issues: CEO succession planning and capital allocation refocusing. We strongly expect many other Air Products shareholders to be concerned about the same issues. The question here, therefore, is not whether change will occur, but what change will look like. Having two different activists gives the company some leeway in choosing to settle with whom it deems a better fit. DE Shaw could mean fewer new directors and no activist principal. But Mantle Ridge has existing relationships with the company and some of its current directors and CEO Ghasemi, dating back more than a decade, and has a reputation for working well with management. As both activists will insist on better capital allocation and a firm succession plan, this should be a win for shareholders either way.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in activist 13D portfolios.