Managing Director Alex Khutorsky comments in the WSJ

Wednesday, 31 July 2013 | Ben Lefebvre

Ackman’s Stake in Air Products & Chemicals Draws Attention to Little-Understood Company

William Ackman’s brash move to buy a 9.8% stake in Air Products & Chemicals Inc. (APD) is drawing attention to a large but little-understood company that has been struggling with sliding profits as a key raw material, natural gas, becomes more expensive.

News Wednesday of the multibillion-dollar purchase by the activist investor’s Pershing Square Capital Management L.P came just days after Air Products reported a 20% decline in profits in its second quarter, to $383 million from $482 million the year earlier, citing a 10% jump in overall costs.

Air Products, led by Chief Executive John McGlade since 2007, produces chemical ingredients for antifreeze, rocket fuel and food among a host of other goods. It uses natural gas both in its products and as a fuel to power its facilities. The Allentown, Pa., company, which posted $10 billion in sales in 2012, has operations in more than 50 countries.

Like other chemical makers, Air Products is seeing its costs rise as natural gas prices–which plummeted in the U.S. due to the fracking boom–slowly bounce back after reaching decade lows a year ago. Natural gas is now trading at $3.44 per million British thermal units, nearly twice the low of $1.90 in April 2012.

Another problem for Air Products is that sales in Europe and Asia have fallen as economies there struggle. Air Products, which has two dozen industrial gas plants in China, said sales in its largest segment–Merchant Gases, which sells oxygen, nitrogen and other gases to industrial manufacturers–dropped 1% in Asia during the quarter. As manufacturing in Asia slows, the company’s sales of argon and helium, which go into computer chips, have fallen.

Air Products is reviewing its businesses to see where it can cut costs, Mr. McGlade, who has been with the company since 1976, said during a call with investors. A recently completed restructuring of its European business has also helped drive costs down, Mr. McGlade added.

But the company’s earnings forecasts demonstrate it is still tackling its challenges. Air Products last week changed its 2013 earnings forecast for the third time in the past year, slashing its original estimate of a high of $5.85 a share to $5.53 a share.

Air Products has been less adept than its competitors Praxair Inc. (PX) and Linde AG (LIN.XE) in passing added costs to its customers and switching its remaining oil-fired operations to natural gas, said Bill Selesky, analyst at Argus Research.

Air Products shares have risen 11% over the past five years. By comparison, Praxair shares have risen 28% and those for Linde by 32% over the same period.

“Ackman is probably thinking Air Products could get closer to these guys if they do things more efficiently,” Mr. Selesky said.

Another option for improving results may be selling off some of the company’s portfolio, said Alex Khutorsky, managing director at chemical M&A advisers The Valence Group.

“There are assets in that company that can be easily detached,” Mr. Khutorsky said. “Some portfolio realignment may be in the cards.”