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Agrium refuses investor demand to spin off retail

Fertilizer and ag retail firm Agrium said Tuesday it would not take the “substantial risk” of spinning off its retail operations, as the company sought to fend off pressure from activist investor Jana Partners.

Jana, a New York City hedge fund, disclosed in a filing on Tuesday that it had bought more than 6.5 million shares of Agrium as of June 30, making it the company’s largest shareholder with about a four per cent stake.

A source close to Jana said the investor has since added to its stake and now holds nearly five per cent of Agrium, which is one of the world’s top fertilizer producers and North America’s biggest farm products retailer.

Jana said in a statement it was disappointed that Agrium had dismissed its views on spinning off the retail arm, which makes up about 30 per cent of the company’s earnings, and said Agrium had failed to address issues around “cost and operating performance”.

Calgary-based Agrium noted its share price has risen more than 40 per cent this year, but Jana argued that Agrium had not focused on “the long-term value creation picture.”

“No benefit”

“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,” Agrium CEO Mike Wilson said in a statement.

Spinning off the retail operations would expose Agrium shareholders to “substantial risk with no sustainable benefit” and the company would not pursue such action, Wilson said.

Jana argued that a spinoff was in the company’s best long-term interests, and said Agrium’s board lacked the expertise needed to oversee the retail arm.

“This lack of expertise has resulted in suboptimal capital allocation and underperformance in retail with respect to managing costs and working capital,” Jana said in its statement.

Discussions between Agrium management and Jana continue, and the source noted that McGraw-Hill Companies — in which Jana bought a significant stake — also initially balked at spinning off a division as the hedge fund requested.

In just over a year, Jana has picked up significant stakes in Marathon Petroleum Corp and McGraw-Hill, while agitating for change at Dutch delivery company TNT Express.

Another source familiar with the matter said Jana started engaging with Agrium’s shareholders in May and reached out to the board around the same time.

Agrium hired Morgan Stanley to review Jana’s proposal, but the investment bank advised that a divestiture of the retail arm was ill-advised and would not create value.

The source said Jana has so far not threatened a proxy fight. Agrium and Jana are supposed to meet later this week, in a meeting that was set a few weeks ago.

Mixed reaction

Independent analyst Chris Damas of BCMI Research said Agrium should look carefully at splitting the retail and wholesale arms and questioned management’s reasoning for rejecting the idea.

But Raymond Goldie, who follows Agrium for Salman Partners, said spinning off the retail side would not add to earnings.

“We agree with Agrium,” he wrote to clients. “Agrium’s retail people know what farmers are doing and what they want.”

Agrium’s shares ended the day up less than a percent on both the New York Stock Exchange and Toronto Stock Exchange.

The stock has soared this year, helped by the U.S. Midwest drought which has scorched crops and driven up corn prices. But Agrium shares are only returning to near the level they reached about 18 months ago, despite bullish farm markets, Damas said.

Fertilizer prices often track the prices farmers can collect for their crops, and corn requires a lot of fertilizer.

Agrium is one of the world’s top producers of nitrogen-based fertilizers such as urea and ammonia and is the biggest retail seller of farm products such as fertilizer, crop chemicals and seed in the U.S.

In 2011, Agrium’s retail operations accounted for $769 million in EBITDA, or 30 per cent of the company’s total earnings before interest, taxes, depreciation and amortization.

Rather than spinning off the retail business, Agrium has been building it up and is aiming to boost retail EBITDA to $1.1 billion by 2015.

The company also has a $575 million deal with Glencore International to buy 232 Canadian farm retail outlets and 17 Australian stores owned by Viterra, which would make Agrium the biggest farm retailer in Canada.

Agrium’s deal with Glencore still needs approval from Canadian regulators. Glencore is attempting to complete its takeover of Viterra this summer.

— Rod Nickel and Euan Rocha write for Reuters from Winnipeg and Toronto respectively.

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