Hilal joins a number of other investors who seek a more focused capital allocation strategy at APD as well as a succession plan for the company’s highly regarded CEO Seifi Ghasemi, who is 80 years old. Ironically, Hilal, when he was with Pershing Square, helped Ghasemi become CEO.
On October 10, another hedge fund that engages in occasional activism, D.E. Shaw, published its own presentation deck on changes it seeks at APD. D.E. Shaw’s areas of focus are similar to those of Mantle Ridge.
APD has a highly valuable core industrial gas business but in recent years has directed a lot of attention and capital towards developing large-scale “green” and “blue” hydrogen projects with less predictable economics.
Green hydrogen refers to the production of hydrogen, which can be used as fuel, through renewable energy sources, whereas blue hydrogen refers to hydrogen created with some non-renewable elements in the production process. Hydrogen-based technologies are promising but also somewhat controversial.
Many investors believe APD’s share price can improve substantially if it curtailed its hydrogen projects and focused more on its core industrial gas operations.
We are sympathetic to these capital allocation arguments and optimistic about Paul Hilal’s potential board level involvement in APD. That being said, we are taking the opportunity to reduce our weighting in APD given the now less compelling valuation, the uncertainties surrounding the potential success of the activists, and our interest in adding ETN to the portfolio.
Since we initiated the American Resilience portfolio on March 1, 2024, APD has generated a total return of 37%, well ahead of the S&P 500 total return of 14%. Valuation played a key role in our decision to include APD in the portfolio, as we believed the core industrial gas operations were being inadequately valued, especially after an earnings disappointment produced sharp downside in the shares earlier in the year.
