The Case for Change
Underperforming Industry Peers
Over the past five years, Air Products has significantly underperformed its industry peers, the S&P 500, and its own potential due to its flawed strategy, inappropriately high-risk capital allocation program, and poor execution. The root cause of these issues is a range of oversight and governance failures at the Board level, including its failure to replace CEO & Chairman Seifollah “Seifi” Ghasemi.
The five-year relative total shareholder return (“TSR”)1, ending October 4th, 2024, the day before announcing our efforts to press for change catalyzed a nearly 10% jump in the Company’s shares, tells a powerful story – Air Products has delivered roughly one-half of the TSR of competitor Air Liquide and the S&P 500, and less than one-third of the TSR of best-in-class competitor Linde Plc.
Deficiencies in Mr. Ghasemi’s judgment, coupled with his failure to maintain execution discipline, have elevated Air Products’ risk profile to unacceptable levels, generated inadequate returns, and destroyed substantial shareholder value.
Mr. Ghasemi and the current Board have misallocated a significant amount of shareholder capital to inferior, non-core projects with high risk profiles that offer inadequate or speculative returns. These include poorly executed “mega projects” which have been plagued by wide-ranging problems and ballooning budgets – adding unnecessary risk to, and diminishing the value of, Air Products’ otherwise low-risk core business.
As a result, Air Products’ margins have been meaningfully depressed by excessive costs directly tied to the expanded scope of its multiple non-core projects. Prior to Mantle Ridge’s engagement, the Company’s historically wide valuation multiple discount to its peers showcases how poorly the market views the Company’s divergent strategy and poor capital allocation today.
Despite these missteps, the Board has allowed Mr. Ghasemi – ten years into his tenure and now eighty years old – to cling to control. He refuses to step aside, as evidenced by his declarations that “I am not going anywhere”2, “I am leaving this Company only one way – feet first”3, “I will be Chairman of this Company so long as I am vertical”4, “I always tell these people they get rid of me when I go horizontal”5, and “I will be the first 100-year-old CEO”6.
The Board’s rejecting Mr. Eduardo Menezes as a CEO candidate reveals that preventing “fresh-eyed” scrutiny of their misguided mega-projects and avoiding the embarrassment from precipitous performance deceleration is their priority.
Shareholders have the extraordinary opportunity to restructure the Company’s underperforming Board into a far stronger one, and in doing so, give Air Products a chance to reset to a far healthier course of consistent, low-risk, high-return growth, just like its competitors.
Under the stewardship of a strong, healthy, reconstituted Board, Air Products stands to create enormous shareholder value through several straightforward initiatives:
- Restore capital allocation discipline
- Build depleted ranks into a robust management team
- Expand margins materially and narrow margin deficit to best-in-class peer
- Bring core business cost structure in line with peers
- Eliminate more than $1.00/share of excess non-core project costs
- Improve the Company’s industry-worst return on capital
- Accelerate growth
- As the smallest player, Air Products can grow faster without straying from core
- Optimize existing and pipeline projects
- Objectively focus on maximizing shareholder value
- Derisk challenged projects
- Restore transparency and integrity to Company disclosures
- Appropriately align compensation
Successfully executing on these initiatives should close the valuation multiple discount at which Air Products trades and generate significant value for Air Products’ shareholders.
1 Source: Bloomberg, as of 10/4/2024, the trading day before Mantle Ridge’s surfacing. Returns in USD and assumes dividends are reinvested.
2 Source: May 27, 2020, Bernstein conference.
3Source: December 18, 2023 transcribed expert network call with former APD SVP: “But as he’s made it very clear that he’s not going to retire from Air Products. He’s going to leave in a box those are his words not mine.”
4Source: June 9, 2020 Deutsche Bank conference.
5Source; May 6, 2016 EvoniK M&A teleconference.
6Source: June 27, 2022 transcribed expert network call with former APD Director of Business Development: “But at the end of the day I mean, he told us that he wants to work until he is, like, 100 years old, so.”
Reset the Board’s Culture & Standards
The Solution to These Self-Inflicted Problems is Clear
Air Products’ Board of Directors must be reconstituted to replace its most problematic directors with new, highly qualified independent directors who bring relevant experience – including from the best-in-class player in the industrial gas industry – to reset the Board’s culture and elevate it to the highest standards of accountability, oversight, and governance.
- Mantle Ridge has nominated four highly qualified independent directors to Air Products’ Board – Andrew Evans, Paul Hilal, Tracy McKibben and Dennis Reilley. These nominees can work closely with the rest of the Board to help restore the Company’s performance and value.
- We have also identified a world-class industrial gas industry executive with an unimpeachable track record of value creation – Eduardo Menezes – who we and others believe is the ideal leader to helm the Company as CEO. A reconstituted Board should promptly launch a CEO succession process that includes Mr. Menezes as a candidate. If chosen as CEO, Mr. Menezes could start immediately.
- Yet rather than engage with us to chart the best path forward for shareholders, Mr. Ghasemi and the Board have chosen to continually mislead shareholders about Mantle Ridge’s intentions in order to cling to their positions and avoid accountability for years of material underperformance. As is made clear in our proxy filings and published correspondence with the Company, Mantle Ridge has never sought control of Air Products.
- On the contrary, the executives we have nominated are prepared to work collaboratively with the reconstituted Board to elevate the Company’s performance and to create durable long-term value for all shareholders. To learn more about Mantle Ridge’s approach, click here.
- To restore the Board’s integrity, elevate its standards of governance, and best address the Company’s troubled projects, and to install effective leadership at Air Products that can best create long-term shareholder value, we urge shareholders to vote the BLUE proxy card “FOR” Mantle Ridge’s four highly qualified director nominees and “WITHHOLD” on the Company Nominees: Charles Cogut, Lisa A. Davis, Seifi Ghasemi and Edward L. Monser.
The “Dream Team”
Change Agents: The “Dream Team” of Industrial Gas Industry Legends Eduardo Menezes & Dennis Reilley
Eduardo Menezes is a distinguished leader in the industrial gases sector with more than three decades of experience at the best run industrial gas companies in the world. He most recently served as the EVP of EMEA for Linde Plc (formerly Praxair, Inc. and Union Carbide), and spent his last 11 years at Linde and Praxair as a direct report to the CEO and Chairman.
Dennis Reilley is a renowned industrial gas industry executive who previously served as Chairman, President and Chief Executive Officer of Praxair, Inc. (now Linde plc). Mr. Reilley is widely considered the architect of Praxair’s best-in-class model, which is distinguished by its culture of empowerment and accountability, relentless cost discipline, rigorous and strict capital allocation program, and focus on risk-adjusted returns. This model is the “gold standard” of the industry and drives consistently strong shareholder returns. During Mr. Reilley’s tenure at Praxair, he achieved best-in-class total shareholder returns, revenue growth, EBIT growth, EBIT margins, and returns on invested capital. Mr. Reilley also established a strong succession plan, positioning Praxair for continued success.
Analysts agree that installing the “Dream Team” at Air Products represents the best path forward for the company and would deliver meaningful long-term value to shareholders:
CMACC
“Mantle Ridge has added two former Linde Executives (Dennis Reilly and Eduardo Menezes) to reshape APD’s sustainability growth strategy. This ‘Dream Team’ could make a difference in the battle for control given strong track records and experience.”
– CMACC, 10/15/24
Wells Fargo
“There is no better-qualified executive in the industrial gas space than Dennis Reilley, who honed the strategy at Praxair to focus on the cost of delivering industrial gases, from plant design to build and operation. Years of continuous improvement gave Praxair, and now Linde, a competitive lead that is hard to match. Eduardo Menezes sat in key operational and regional leadership roles at Praxair and was then given the most challenging region at the combined Praxair/Linde to manage – Europe, Middle East, and Africa. The success of Linde since the merger has been due to the very effective execution of the business combination and Mr. Menezes was central to that success.”
– Wells Fargo, 10/15/24
Redburn
“This looks very much like a ‘dream team’. Dennis Reilley was the original architect of Praxair’s strategy when it was spun out of Union Carbide in 1993, and is responsible for its unique culture, focus on operational excellence and disciplined capital allocation. Eduardo Menezes successfully ran the Praxair North and South America businesses, and latterly Linde’s EMEA segment before retiring in 2021.”
– Redburn, 10/25/2024
Barclays
“We would expect both Mr. Reilley and Mr. Menezes to be seen as strong candidates by investors: Linde (formerly Praxair) is currently considered by many investors as the standard bearer of operational excellence in the industrial gas space, and short of Mantle Ridge convincing Linde’s current C-suite to join them, we think these two are among the best alternatives.”
– Barclays, 10/15/2024
Deutsche Bank
“Mr. Reilley was one of the architects of Praxair’s highly successful industrial gas strategy, a strategy which is still in existence today…Mantle Ridge is eyeing Mr. Reilley to become Air Products executive chairman and Eduardo Menezes, former Linde and Praxair executive, as Air Products CEO. Mr. Menezes is a well-regarded industrial gas executive. As such, the management team proposed for Mantle Ridge to lead Air Products is, our view, strong as well.”
– Deutsche Bank, 11/24/2024
JP Morgan
“Reilley and Menezes have proven themselves as excellent industrial gas executives. Reilley, who is now 71, has demonstrated managerial expertise at the CEO level and Menezes, who is 61, has shown high competence in large operational roles. If Seifi Ghasemi were to stand aside, it would be difficult to imagine a stronger pair of candidates to take his place.”
– JP Morgan, 10/18/24
Our Nominees
Mantle Ridge’s four highly qualified director nominees will provide much needed independent voices in the boardroom and bring extensive expertise and relevant experience, including from the industrial gas industry to the Company’s Board. They will provide valuable insight on how to address the most pressing challenges the Company currently faces across corporate and operational strategy, capital allocation, and human capital. We believe these nominees can help instill accountability and governance on the Board while driving improved performance – and ultimately enhance value for all Stockholders.
Learn more about the Nominees: