Another hedge fund showing interest in the agriculture space
emerged on Monday, Oct. 1, 2012. Barry Rosenstein, the founder of
the $3.5 billion Jana Partners LLC presented his case to split up
Agrium at the Value Investing Conference in New York on Oct. 1,
2012. You can find the entire presentation here.
Jana Partners, llc "made our case privately to Agrium's
management, beginning in May and continuing for several months,
and have shared our full analysis with Agrium's board," according
to Jana. Jana's strong preference is always to engage with
companies privately in the hopes of convincing them to pursue
value-creating change of their own volition. Agrium has responded
constructively to our calls for improved return of capital,
substantially increasing the size of its dividend and initiating
its first large share repurchase in a decade, and has conceded
that there is always room for operational performance
However, Agrium has failed to respond constructively to other
aspects of our analysis, without offering legitimate
justifications for failing to do so. Agrium made a public
response, stating, "There is nothing new in statements made by
Jana today. Agrium remains confident that shareholders will
receive far greater value, with less risk, under the company's
current strategy," said Michael Wilson, Agrium's President and
"Agrium has had several meetings with Jana since it first
contacted Agrium in late May, including meetings in New York in
early July and the last meeting held in mid-August. In early
August the Agrium Board unanimously determined it was not in the
best interest of shareholders to pursue a spin-off of retail
after having spent two months evaluating the concept. Agrium has
met extensively with shareholders since JANA disclosed its idea
to break up Agrium. There is overwhelming shareholder support for
the continuation of Agrium's integrated strategy."
Jana Partners owns 6.5 million shares or about 4% of Agrium. The
second-largest shareholder is Royal Bank of Canada at 4.9 million
shares. Acadian Asset Management LLC increased its holding by 2.5
million in the second quarter of 2012 to 3.4 million shares
Major hedge fund owners as of June 30, 2012 are:
� Ray Dalio's Bridgewater Associates purchased 27,000
shares in the second quarter of 2012.
' Passport Capital purchased 153,600 in the second quarter of
� Scott Black's Delphi Management and
both raised their holdings, which total over 80,000 each.
Agrium is a major retail supplier of agricultural products and
services in North and South America and a leading global producer
and marketer of agricultural nutrients and industrial products.
The company produces and markets three primary groups of
nutrients: nitrogen, phosphate and potash as well as
controlled-release fertilizers and micronutrients.
Recent Company Events:
In September, Agrium was in the capital markets with a $500
million aggregate principal amount of 3.15% debentures due Oct.
1, 2022. The company also bought back 9.7 million of its shares
in September, which was due in part to the meetings with Jana in
May and August.
On March 20, 2012, Agrium announced that it had entered into a
definitive agreement with Glencore to acquire the majority of
Viterra's Agri-products business upon completion of Glencore's
recently announced supported acquisition of Viterra. Under the
original agreement, Agrium would acquire approximately 90 percent
of Viterra's Canadian retail facilities, all of its Australian
retail facilities, as well as their minority position (34%) in a
nitrogen facility located in Medicine Hat, Alberta. As of Aug. 2,
2012, Agrium announced the sale of the minority position in the
nitrogen facility to CF Industries at the close of the
transaction for USD915 million.
I had purchased Viterra in 2005 and 2008 for its undervalued
Saskatchewan farm land at an average price of $7.18. I was both
happy and disappointed with the $16.50-per-share takeover: happy
because I received a nice return on my investment in that time
period and disappointed that I have to find an equally
undervalued agriculture company to replace it.
According to Agrium the "Viterra transaction is an excellent fit
with our stated strategy of growing across the value chain, and
that our Crop Production Services Retail business can provide
significant value for Canadian farmers in a market where we
currently have a limited retail presence. Agrium is committed to
maintaining strong communication with our stakeholders and will
provide updated details regarding this transaction as it
Jana Partners Thesis
"Retail is an undervalued and undermanaged asset, and bold action
to unlock this value is long overdue."
Jana believes Agrium executives' conglomerate strategy is holding
back the value of both the stable retail business and highly
volatile fertilizers-producing business.
The stock price is up 57% year to date and with this exception,
Jana Partners LLC says on a long-term basis Agrium has
consistently underperformed the weighted average of its pure-play
Jana Partners' Structural and Operational Issues with
Management's conglomerate structure does not make sense: the
stable retail business with volatile fertilizer business. Jana
believes that this generates no meaningful synergies, which is
why no other company in the industry pursues this conglomerate
structure. Their optimal capital structure and capital
allocations are limited due to the conglomerate structure.
Jana goes on to say that management has failed to achieve
operating leverage on the billion-dollar retail acquisition of
UAP, causing retail to under-earn substantially. The company has
also failed to manage working capital in retail and has failed to
properly integrate or generate acceptable returns on some of its
largest retail acquisitions, although Jana acknowledges a recent
return of capital announcement which followed our engagement with
the company. According to Jana the company had the worst track
record among its peers in returning capital to shareholders.
Jana also criticized its poor disclosure of its retail sector in
its financial statements. This problem has "inhibited
shareholders' ability to measure performance over time, to assess
returns on acquisitions and - ultimately - to properly value
Where is the value to be unleashed in a split-up of the retail
and fertilizer businesses?
Jana believes there are four ways a split into two companies
would unleash value:
1. $15 to $20 a share by eliminating the sum of it parts and
busting the conglomerate discount by a tax free spin-off.
2. $20 a share by eliminating excess costs in retail and reducing
its corporate allocated overheard.
3. $10 a share by releasing excess working capital and buying
back shares and increasing the dividend.
4. Adding real distribution executives to the board to who can
better define operational and strategic goals for the company.
Additionally, Jana goes on to say that in its 2011 Investor
Conference, Agrium itself argued that its retail business is
undervalued. The company went on to compare the forward EV/EBITDA
multiples of retail competitors: Tractor Supply (tsco) at 11,
Watsco (Wso) at 10 and Wesco (
) at 9.
Summary: Hedge funds have shown great interest in the agriculture
space. Jana is going after a specific split up strategy to create
value. That said, Jana knows that the agriculture space has only
just begun to gain interest. After 30 years of being a terrible
business, the past few years have been good to the agriculture
space, and the future is even more attractive to investors.
Additionally, the Viterra retail acquisition are about to close
and Jana wants to make sure it can maximize its value. If you own
any of the corporate paper that is outstanding, including the
recently completed $500 million debenture due Oct. 2022, watch
this story closely as debt ratings can change depending on how it
accounts for the debt between each company, if a split up does
occur. In order for the split up to occur Jana has to convince
the many Institutional shareholders who hold most of the company
About GuruFocus: GuruFocus.com tracks the stocks picks and
portfolio holdings of the world's best investors. This value
investing site offers stock screeners and valuation tools. And
publishes daily articles tracking the latest moves of the world's
best investors. GuruFocus also provides promising stock ideas in
3 monthly newsletters sent to