The beginning story has a familiar ring: New York hedge fund takes on Calgary company over strategy – but the saga of Agrium Inc. may well end very differently than the tale of Canadian Pacific Railway.
Agrium, unlike CP, has a strongly performing stock, which is close to where it was in the pre-crisis commodity spike. The fertilizer maker and retailer also has a management team with serious credibility on the strategy and execution front.
Jana Partners, the hedge fund that is agitating at Agrium, wants Agrium to split its retail and wholesale fertilizer sales business. Jana has acquired about 5 per cent of Agrium’s stock, becoming the biggest shareholder, and pitched the idea to the company. Agrium has already said that a break-up is not in the cards.
At CP, it was an easy case for activist Bill Ackman to make that the company was an underperformer, and there was little love for management. Analysts immediately backed Mr. Ackman and CP’s stock surged on the idea.
Agrium is going to be a tougher case to make. Chief executive officer Mike Wilson has a reputation as a good strategic mind, and a good operator and acquirer. The analyst reaction is skeptical. Tellingly, Agrium’s stock has barely moved, signalling that the market’s immediate take is that Jana isn’t going to create any value any time soon.
“I think it’s a good idea in some cases but not in Agrium’s case because there is a lot of synergy between the retail business and the wholesale business,” analyst Ray Goldie of Salman Partners said on Business News Network. Mr. Goldie argues that the retail network allows Agrium to gather intelligence from farmers, which Agrium can use to tailor its fertilizer production.
Scotia Capital analyst Ben Isaacson argues also that there’s not much upside. Spinning out retail would create about $10 a share in value, or about 10 per cent on the current share price. However, he said, there would be a loss of value on the wholesale side as synergies disappear, offsetting some of that gain.
He argues that the spinout would be worth doing if Agrium could get a multiple of 10 times earnings before interest, taxes, depreciation and amortization (Ebitda). “But we don’t think the market would be willing to pay 10 times,” he wrote.
Mr. Goldie concurs that there’s value in Agrium that the market isn’t reflecting, but that’s more about the state of the markets than anything the company is doing wrong.
“Agrium is worth close to double what it’s current share price is, but I think that of so many other companies as well,” he said on BNN.