Inputs Monitor Editor Davis Michaelsen adds his perspective into the happenings of the inputs markets.
REVISITED: Agrium Unmoved - JANA Undeterred
Apr 15, 2013
A crucial vote was held last week in Calgary at Agrium Inc's annual shareholders meeting, and the shareholders voted to keep the incumbent board in place rather than seeding the board with nominees from JANA Partners. JANA had expected to win two seats according to their own early count, but the final tally snubbed the New York hedge fund, and has the activist investor fuming.
We have reported on the dialogue between the two throughout the conversation and neither has shown signs of backing down -- even in light of the official vote count. JANA accuses Agruim of tampering with the vote and vows to investigate. This is a fascinating story that illustrates two different positions in the commodities marketplace and how those perspectives have shaped the discussion. In one corner, Agrium -- tried and true, diverse and successful. In the other corner, JANA Partners -- this firm has had prior success with McGraw Hill and Marathon, dividing these companies to unlock shareholder value. The situation reminds me of those old television commercials for Pace Salsa -- New York City!?
The following is an updated version of an earlier blog. If you are a new subscriber, this will help you get a handle on what all the fuss is about.
From the Monitor archives:
Calgary, Alberta based Agrium (AGU) is among the World's largest producers of nitrogen-based fertilizers like urea and ammonia, and is also the biggest retail seller of fertilizer, crop chemicals and seed in the United States.
JANA Partners Llc., an investment firm from New York City, holds a 7.5% stake in Agrium Inc. Since early summer 2012 when JANA bought in, it has argued for structural and operational improvements -- including a proposed split of Agrium's wholesale and retail divisions -- that they expect would add value for shareholders. But Agrium has publicly refused more than once.
One needs look no further than Agrium's definition of sustainability to understand why it is resistant to the suggested restructuring. It defines sustainability as, "The enduring well-being of interacting economic, environmental and social systems." The key word shows up midway through the definition..."interacting". Agrium's arms are long, supplying fertilizer to customers around the Globe while tending to the needs of the individual farmer at the retail level.
"We can't comment on what kind of stake any shareholder may or may not hold in Agrium," said Agrium spokesman Richard Downey in an email comment to Reuters. "What we can say is that Agrium's integrated strategy is producing record results and sustainable value for shareholders and that we do not plan to spin off our retail business."
What is written between the lines of all of Agrium's mission related statements is the strong belief that integrated diversity yields security.
JANA Holdings also demonstrates a penchant toward diversity in its portfolio which holds stock in Apple (AAPL), Expedia (EXPE), Phillips 66 (PSX) and others including Canadian based fertilizer giant Agrium. I spoke to a partner at JANA who affirmed Agruim's commitment to producers but noted that a golden opportunity for value creation is not being realized here and, "at the end of the day, it's up to the shareholders to make the call. We've been in similar situations where companies resisted our calls for change but by making our case to shareholders we were able to prevail and we don't view this situation any differently."
Agrium boasts the largest working inventory of any of the fertilizer giants and this inventory is thought by some to help insulate AGU against market forces. JANA disagrees noting that AGU's shares have performed no better than most uninsulated peers over the last cyclical downturn and failed to produce on the subsequent upturn. By cutting the excessive inventory, JANA believes AGU could reduce its reliance on volatile commodities and stabilize retail earnings, enhancing its value.
A New York commodities investment strategist told the Monitor, "Agrium shares have out-performed its peer group over the last five, three and one-year and year-to-date. But outperformance could have been even better if the two entities, retail - 40% of EPS - and wholesale - 60% of EPS - were separated. Long-only relative-term investors might prefer the better stability of the retail side while absolute-return hedge fund investors may prefer the optionality of the wholesale side."
Favorable natural gas prices promise to widen margins for nitrate producers like AGU. Dry soil conditions have growers throughout the Midwest praying for rain just so they can get an accurate soil test, let alone, apply nutria...many will likely opt to wait until spring. On top of that, China has yet to book its 2012 Potash, and India reports it will purchase no DAP or potash until after the end of this fiscal year.
The only certainty in a drought year is uncertainty. With a record of outperformance and a solid sustainability position, Agrium should weather the drought storm as well as or better than its peers. JANA has made a 700 million dollar bet on the restructuring and has every confidence that shareholders will take advantage of this value creation opportunity. But companies like Agrium are not likely panic or look to siphon quick profits. Agrium has made it clear that JANA's restructuring proposal is not the right move for the company or its customers. JANA may find in the end that Agrium is as difficult to move as the soil itself.