* Stake is Ackman's largest-ever investment by value
* Air Products shares up 3.5 percent
By Svea Herbst-Bayliss, Swetha Gopinath and Ernest Scheyder
BOSTON/NEW YORK July 31 Hedge fund manager William Ackman unveiled his biggest bet ever on Wednesday, a $2.2 billion play on Air Products & Chemicals Inc that the billionaire trader kept secret for two months.
The activist investor's Pershing Square Capital Management now owns 9.8 percent of the industrial gas maker, making it the company's biggest shareholder. Pershing Square might have bought even more, but Air Products adopted a "poison pill" defense to prevent a takeover after some on Wall Street began wondering whether the company might be in Ackman's sights.
Speculation mounted earlier this month that Ackman, who tends to make only a few concentrated bets at a time, was laying the groundwork for something big when he set out to raise as much as $1 billion to invest in a company that he called strong but lagging its peers and declined to name.
Pershing Square began buying Air Products stock in early June and Ackman said in a filing that he believes the company to be "undervalued" and an "attractive investment."
In some ways, Air Products may look a little like Canadian Pacific Railway, which the hedge fund also described as a rock solid company that was woefully underperforming.
In the 21 months since Ackman took on Canada's second-largest railway with a $1.4 billion investment, he got seven new directors elected to the board, replaced the chief executive and scored one of his biggest investment successes, making some $2 billion in profit in less than two years.
"We like Air Products because of its defensive characteristics which are beneficial in times of slower economic growth," said James Sheehan, an analyst at SunTrust Robinson Humphrey. But he also said, "the company does lag on several metrics and this is where an activist investor could really improve things."
As word spread on Wall Street that Ackman was trimming his position in Canadian Pacific and readying another big bet, the fund still managed to keep the target's name secret until it had completed buying on Tuesday. It announced the news on Wednesday in a regulatory filing within the 10 calendar day window of owning 5 percent or more in publicly traded company.
To build the new bet quickly, Ackman relied on seven holding companies Pershing Square incorporated in Delaware according to the SEC filing. Most of the entities were incorporated in June.
Over the years, Ackman has used similar entities to accumulate shares in target companies, such as for the big stake he bought in Fortune Brands in 2010.
Air Products, whose rivals include Praxair Inc, France's Air Liquide SA and Germany's Linde AG , said in a statement that it has not been in touch with Ackman, but looks forward to engaging with Pershing Square to understand its views.
Apparently, the Air Products board realized that Ackman - or someone - was interested in the company, in light of heavy stock buying; it adopted a "poison pill" takeover defense.
"The board was paying attention," said Keith Gottfried, a partner at law firm Alston & Bird. "They acted quickly and thoughtfully to protect their shareholders and create a little bit of breathing room."
Traditionally, Ackman starts off with politely worded suggestions for change out of the media's glare, but if his past record sheds any light on the future, he can quickly become demanding. Three chief executives - at JC Penney, Canadian Pacific and Procter & Gamble - lost their jobs not long after the hedge fund manager appeared.
In order to assemble as much financial firepower as possible, Ackman asked his current investors, including pension funds in Massachusetts, New Jersey and Arkansas and Blackstone Group, to consider sending more money for the unnamed target.
He offered a fee cut in exchange for locking up investors' money for three years, suggesting he might need time for his new investment to play out, investors said.
Ackman calls himself a long-term, strategic investor who often sticks with a bet for as much as four years.
The fact that this bet did not leak underscores how skillful some hedge fund managers have become in placing bets and asking to delay the disclosure process by requesting "confidential treatment" from the SEC, under the argument that disclosure might interfere with a business strategy.
Pershing Square has made use of this argument, most recently when it revealing that it had 5.9 million shares of Mondelez International.
For Ackman, the Air Products disclosure comes at a critical time, as he rides a $1 billion short bet against Herbalife Ltd , which Reuters reported is costing the fund some $300 million in unrealized losses.
On Wednesday, as Air Products rising share price helped buoy returns, Ackman was also losing more money on Herbalife amid news that billionaire investor George Soros, a sometime tennis partner of Ackman's, had taken a large long position in the nutrition and supplements company. Billionaire Carl Icahn, a long-time rival, also holds a large long position in Herbalife, which Ackman says is a pyramid scheme. Ailing retailer JC Penney has also weighed on this year's returns, investors have said.
With Air Products shares closing at $108.64 Wednesday - up 2.9 percent on the day and up about 16 percent over the last month - Ackman might be able to show his investors gains for the month and boost his year-to-date performance. Other winners in the portfolio include Procter & Gamble, Canadian Pacific Railway and Howard Hughes Corp.
What Ackman may like about Air Products is that the company has few rivals, and its industrial gas business has lucrative, long-term contracts. However, in recent months it has been hit by high exposure to sluggish growth in Europe, and analysts say it should divest its non-core gas businesses.
Those non-core businesses account for roughly 20 percent of the company's sales, including a chemicals unit and one that caters to computer chip makers.