A U.S. hedge fund’s campaign to push Calgary’s Agrium Inc. to split itself up faces an uphill climb after the company rejected the idea and investors appeared skeptical.
Jana Partners of New York has amassed a position of about 4 per cent of Agrium, making it the company’s largest shareholder. Jana is known for quiet but persistent pushes for corporate change at companies such as McGraw-Hill Cos., which eventually split in two after prodding from Jana and its allies.
In recent weeks, Jana has been hard at work trying to build support for its plan for Agrium, which has built itself into a $15-billion powerhouse through a series of acquisitions. Agrium has a wholesale business that produces fertilizer and a retail arm that sells fertilizer, seed, chemicals and other agricultural products to farmers.
Jana has produced a so-called “White Paper” that advocates splitting the two units apart, and has been meeting with analysts and investors to try to sway them, sources said. The hedge fund also met with the company, which hired investment bankers to look at the idea before declaring Tuesday that the plan was not in the company’s best interests. One of Agrium’s chief concerns with having a standalone retail division is said to be that there are no directly comparable publicly traded companies in that sector, to give a sense of how investors would value the operations.
The early reaction from investors is nothing like the last time a New York hedge fund went after a high-profile Canadian firm.
When Pershing Square Capital Management, under Bill Ackman, launched a fight to change the strategy and management at Canadian Pacific Railway Ltd., the response from markets and analysts was an immediate surge in CP’s share price in hopes of better profits. Mr. Ackman quickly drew backing from large investors who were frustrated with CP’s performance.
Agrium’s management team, by comparison, is highly regarded among many large Canadian shareholders. There were no early signs of a revolt in Agrium’s share price, which barely budged after the Jana plan became public and closed the day up 0.4 per cent to $95.93. Many analysts, too, were skeptical.
"This is a superbly managed company," said Peter Letko, co-founder of Letko, Brosseau & Associates, one of Agrium's biggest shareholders. "Mike Wilson and his team have done a wonderful job."
He said that there are "very good reasons" why the company has chosen to own both retail stores and fertilizer manufacturing operations. Mr. Letko has not yet heard directly from Jana the logic of its proposal, but given his view on Agrium, he said it would have to be "very thoughtful" to be persuasive.
Agrium said its board unanimously rejected the idea of a split.
“Spinning off retail would expose Agrium shareholders to substantial risk with no sustainable benefit, and we will not be pursuing it,” Agrium chief executive officer Michael Wilson said in a statement, adding that he believes the company’s shareholders, aside from Jana, will support him.
“We are in close contact with our shareholders and take their views seriously. We are confident the vast majority understand and support our strategy,” he said.
Agrium views the retail network as a steady source of earnings that offsets the big cyclical swings in the price of wholesale fertilizer and the natural gas required to make it. Jana doesn’t believe that, and instead argues that the company would fetch a higher valuation if the retail network of farm stores was hived off from the fertilizer manufacturing arm, according to people familiar with Jana’s proposal.
Jana’s plan makes sense to Chris Damas, an independent analyst at BCMI research, who argues that there’s no need for Agrium to remain in both businesses as a hedge.
“Investors could simply buy or not buy each division, if they were separated,” Mr. Damas said. “They do not need Agrium to smooth out volatility.”
Jana is also said to be concerned about what it believes are rising costs and what it worries is poorly managed inventory. Agrium, said people familiar with the dispute, believes that Jana misunderstands its business. For example, Agrium argues some of the apparent rise in costs results from a shift in accounting methods to reflect new international reporting standards, the people said.
Through a spokesman, Mr. Wilson declined a request for an interview. Jana issued a statement saying that it is disappointed that Agrium would reject its ideas before discussions have concluded. “Even if Agrium is right that the market will never appropriately value its retail business, this argues for the pursuit of strategic alternatives, not the status quo,” Jana said, adding that it looks forward to continuing its discussion with the company.