BUSINESS

Agrium: no plans to sell retail division in response to hedge fund pressure

08/14/2012 06:47 EDT | Updated 10/14/2012 05:12 EDT
CALGARY - Agrium Inc. said Tuesday that it has no interest in shedding its retail division — an idea activist investor and New York hedge fund Jana Partners is urging the fertilizer company to consider.

"Agrium's board has carefully evaluated the idea of spinning off retail and has unanimously determined that it is contrary to the best interests of the company and its shareholders," CEO Mike Wilson said in a release.

"Spinning off retail would expose Agrium shareholders to substantial risk with no sustainable benefit, and we will not be pursuing it."

In a release Tuesday, Jana confirmed it's been talking to Agrium about its "conglomerate structure, cost issues, operating unerperformance in retail and suboptimal capital allocation, all of which we believe have prevented Agrium from recognizing its true value potential over a long-term period."

"We have worked closely with industry experts in our analysis and believe our discussions with Agrium have been productive, including with respect to its recent large-scale share repurchase," it said, referring to a $900-million share buyback program announced earlier this month.

Jana — which owns a roughly four per cent stake in the company — expressed disappointment in Agrium's outright rejection of the spinoff notion.

"We also note that Agrium has addressed only its structure and has not truly addressed the cost and operating performance improvement opportunities we have identified, the fixing of which could generate billions in value."

Jana also said it wants to add more retail distribution experience to Agrium's board of directors.

"We believe that lack of expertise has resulted in suboptimal capital allocation and underperformance in retail with respect to managing costs and working capital."

According to documents filed with the U.S. Securities and Exchange Commission on Tuesday, Jana held about 6.5 million shares in Agrium (TSX:AGR).

A source familiar with the matter said there's "virtually no upside" to breaking up Agrium.

Sometimes corporate break-ups make sense, but the source said Agrium is entirely focused on getting fertilizers and other products to farmers.

"It's not like you've got an arm here that publishes Fertilizer Weekly or something like that."

Agrium is not the only big Calgary company to come under pressure from a New York hedge fund in the past year.

Pershing Square Capital Management waged a months-long battle and eventually replaced the CEO of Canadian Pacific Railway Ltd. (TSX:CP).

Unlike CP Rail, which critics accused of underperforming, Agrium has been posting strong earnings growth and recently more than doubled its dividend.

Investors seemed to have a tepid response to the Agrium news. Shares in the company, which has been trading near its highs for the year, barely budged, gaining 40 cents to $96.93 on the Toronto Stock Exchange.

Charles Neivert, an analyst at Dahlman Rose & Co. in New York, said he sees no compelling reason to split off Agrium's retail business.

"I think the retail business is going to get a rather low multiple on a standalone basis and you're not going to end up making the kind of gain you think you will," he said.

"I think the company has many other alternatives to increase value and that's not one of them."

A split makes sense when one business segment is draining the resources of another, but that's not the case with Agrium, he said.

If anything, having the retail business will come in handy for Agrium if it ever has extra fertilizer tonnage that needs to find a market.

"They don't need it this second, but as they lose share, that retail business may need to absorb more of their own production than it does today," said Neivert.

Agrium said it wants to continue with an integrated business strategy that combines retail sales and large-scale fertilizer production.

"We are confident that Agrium shareholders will receive far greater value with less risk under the company's current strategy," Wilson said.

Agrium originated as a fertilizer producer and diversified into other parts of the agriculture services sector, including a major U.S. retail presence that it built up through acquisitions.

The company has signed a deal to buy some of the assets of Viterra Inc. (TSX:VT), a major grain-handler and agricultural supply company that is being acquired by European commodities giant Glencore International.

Earlier this month, the company reported a profit of US$860 million or $5.44 per share for the quarter ended June 30, compared with $718 million or $4.54 per share a year earlier.

Quarterly revenue came in at $6.8 billion, up from 10 per cent from $6.2 billion a year ago.

Agrium has said it remained optimistic in its outlook for the rest of the year despite a severe drought affecting the U.S., which it said will likely lead to crop yields being revised downward.