(Corrects percentages in fourth paragraph below ‘Moral Battle’ subhead in story first published on Nov. 20.)
Activist investor Jana Partners LLC’s campaign for changes at Agrium Inc. (AGU) is fueling speculation it will ultimately boost shareholder value even if it doesn’t force the fertilizer company to spin off its retail farm-supply unit.
Jana prompted Marathon Oil Corp. (MRO) and McGraw-Hill Cos to consider spinoffs, and the New York-based hedge fund said yesterday it raised its stake in the Calgary-based company to 6.2 percent and picked five board nominees. Agrium resisted, saying it’s on the right path, has the support of most shareholders and believes Jana won’t succeed.
“It’s not necessarily going to be a binary event where one loses and one wins,” Sachin Shah, a Jersey City, New Jersey- based special-situations strategist at Tullett Prebon, said yesterday in a telephone interview. “It’s probably going to be a compromise where Agrium says some of these ideas are good, Jana gets two to three directors and the stock goes up.”
Jana is turning up the heat on Agrium six months after it began talks with the company. Its campaign follows activist investor William Ackman’s successful proxy battle that led to the ouster of Canadian Pacific Railway Ltd. (CP)’s Chief Executive Officer Fred Green.
“There’s quite a hurdle for them to get over to persuade guys like us to support them,” Peter Letko, co-founder of Letko Brosseau and Associates Inc. in Montreal, which holds about 2.5 million Agrium shares, said yesterday by telephone. Agrium’s management has done a “superb job” running the company, he said.
Agrium has climbed 5.7 percent in Toronto since Aug. 13, the day before Jana made public its proposals for the company. It was little changed today, closing at C$101, giving the company a market value of C$15.1 billion ($15.2 billion). The shares have gained 48 percent this year.
Jana, Agrium’s largest shareholder, is proposing a tax-free separation of the company’s network of farm-supply outlets from its wholesale fertilizer arm. The fund also has urged Agrium to boost capital returns, improve disclosure and reduce costs, Jana Managing Partner Barry Rosenstein said Oct. 1 in an investor presentation. The changes may add $50 to Agrium’s share price, Rosenstein said.
“I don’t know whether it’s going to be hard or easy, but I know that we have a compelling case that shareholders seem to be reacting very positively to,” Rosenstein said yesterday in a telephone interview.
“Agrium remains committed to its highly successful integrated strategy,” the company said yesterday in a statement. “Agrium’s shareholders have overwhelmingly rejected Jana’s ideas. As a result, we believe Jana’s attempt to run its own slate for Agrium’s board is almost certain to fail.”
Wilson said Nov. 7 that Agrium has improved its financial transparency, elaborating on data showing returns on operating capital and profit margins. The company also has pledged to report same-store sales twice a year, in the second and fourth quarters.
Agrium sells seeds, fertilizers and herbicides to farmers in its chain of outlets, while its wholesale business produces crop nutrients such as ammonia, potash and phosphorus. Agrium generated 59 percent of its third-quarter revenue from its retail unit, compared with 37 percent in its wholesale fertilizer business, according to data compiled by Bloomberg.
Agrium should be kept together because the retail unit informs the wholesale fertilizer unit, said Raymond Goldie, an analyst at Salman Partners Inc. in Toronto, who recommends investors buy the stock.
“The key to the company’s success in marketing are the people on the ground -- the management,” Goldie said yesterday by phone. “The job of the board of directors isn’t necessarily to have expertise in the industry, but to make sure that the company follows correct and appropriate procedures.”
The argument for Jana, which oversees about $3.5 billion in investments and commitments, is that the market likes pure plays and anything that uses that business model tends to have a greater value than a company with diverse interests, Goldie said.
“Jana thinks that if you spin out the company into two, they’re going to be worth two-and-a-half,” he said. “The counter argument is that there are advantages to vertical integration of a company.”
Jana is an event-driven fund, meaning it generally invests in companies undergoing changes such as mergers, spinoffs and bankruptcies. By raising its stake in Agrium to more than 5 percent, the fund has the right to call a special meeting of Agrium shareholders.
“I don’t think Jana has won the moral battle yet, other than being a highly public disgruntled shareholder,” Chris Damas, a Barrie, Ontario-based analyst with BCMI Research, said yesterday in an e-mail.
The market is skeptical that any of Jana’s proposals will go through, said investor Troy Patton, president of Archer Investments Corp.
“For Jana, this is more about staying in the limelight and so that their name is out there,” Patton, whose company manages $83 million including Agrium shares, said yesterday by phone from Indianapolis.
Investment advisers control at least 78.3 percent of Agrium, according to data compiled by Bloomberg based on holdings disclosed by investors. Hedge funds own at least 11.4 percent of disclosed positions, the data show.
“Canadian pension funds prefer to make their views known or instigate change through dialog rather than costly, public proxy battles or litigation,” Andrew MacDougall, a Toronto- based mergers-acquisitions lawyer at Osler, Hoskin & Harcourt LLP, said July 9 in a note to clients.
“However, the CP Rail battle shows that in the current low-yield environment, institutional shareholders are willing to support change if someone else spearheads a proxy battle and provides a compelling argument for change,” MacDougall wrote.
By deliberately seeking to oust just five of Agrium’s 11 directors, Jana may be trying to avoid a formal change in control that could disrupt agreements between Agrium and its bondholders, Robert Schulz, a professor at the University of Calgary’s business school, said yesterday by phone.
“It’s really not about the numbers -- its about having the right people on the board,” Rosenstein said yesterday. “I don’t think anybody can make any argument, and certainly the company didn’t make that argument today, that we don’t have the right people here.”
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