Allentown firm: Grow or divest

Air Products & Chemicals Inc., a U.S. industrial-gas producer based in Allentown that has been targeted by the activist investor Bill Ackman, said units that don't make gases need to improve their profitability or they will be divested.

Industrial-gas businesses will be reorganized by geography, ending divisions by product, chairman and chief executive officer Seifi Ghasemi said last week in a presentation. Electronics materials and performance materials will be combined into a new unit that, along with waste-to-energy, must widen profit margins, he said.

"If they improve their performance in such a way that returns are not dilutive to our industrial-gases performance, we will keep them," Ghasemi said in a webcast from the Credit Suisse Basic Materials conference in New York. "Otherwise we will divest them."

Ghasemi, who led the restructuring of the chemical company Rockwood Holdings Inc., joined Air Products in July. Ackman's Pershing Square Capital Management L.P., the largest shareholder in Air Products, last year began demanding changes at the company after it underperformed the gas producer Praxair Inc.

"We see Air Products becoming a nimbler, more focused and accountable company, which will challenge Praxair to be the best industrial-gas business in the world," Chris Shaw, a New York-based analyst at Monness, Crespi, Hardt & Co. who rates the share neutral, said Thursday in a report.

Rather than holding a sale process for the non-core assets, Ghasemi probably will test the market for their value while he tries to boost profitability, similar to what he did at Rockwood, Shaw said. Any asset sales could be used to pay down debt or to boost returns to shareholders, he said.

In addition to focusing on its core industrial-gases and equipment businesses, Air Products will expand in key geographies where it has an advantage, Ghasemi said. Capital spending plans will face higher hurdles as the company focuses on boosting cash flow and return on capital.

"Air Products will likely be exiting countries where it has low market share and therefore low" return on capital, Mark Gulley, a New York-based analyst at BGC Financial LP who rates Air Products neutral, said in a note Thursday.

Ghasemi said the businesses that face divestment can remain with the company if they improve margins by at least 7 percentage points. Managers in all units will receive bonuses based on achieving earnings goals in their business rather than based on companywide performance, he said.

Ghasemi said fiscal fourth-quarter earnings will rise about 10 percent to $1.60 to $1.65 per share, repeating the company's July forecast. The average estimate of 19 analysts in a Bloomberg survey was $1.62.

The changes go into effect Oct. 1, Air Products said in a statement last week. On the same date, the company said, Air Products will increase some product prices by as much as 25 percent, due to pressures, including operating expenses and "supply and demand imbalances."