Agrium Inc.'s escalating dispute with activist hedge fund Jana Partners LLC raises a couple of age-old issues for integrated companies. First, assigning fair value to the disparate parts requires more brain cells than many investors are willing to expend. Second – and, maybe, more to the point – the parts often look like better takeover stories than the whole.
Jana, which owns about 6 per cent of Agrium's shares, ramped up its spat with the Canadian agricultural company Monday by announcing it will run its own slate of five candidates for Agrium's 11-member board. In doing so, Jana accuses Agrium's board of being unresponsive to and uncommunicative with shareholders, of obscuring and manipulating the facts regarding the valuation of its assets, and of failing to rein in management's poor cost controls and "suboptimal" allocation of capital.
But Jana's problem with Agrium really boils down to this: Agrium operates both a fertilizer-manufacturing arm and an agricultural-products-retailing arm, and Jana believes having both operations under one roof is keeping them (and more importantly, their investors) from getting their full due from the stock market. Jana wants Agrium to spin off the retail operation. Agrium doesn't want to.
A big part of this issue is trying to figure out what these two sides of Agrium's business are worth in a combined form; as Agrium itself notes on its website, "We are the only publicly traded company that crosses the entire agricultural value-chain." For investors, when you're sort-of buying a fertilizer maker and sort-of buying an agricultural retailer, it's unclear how much value to give each side – and how much value to afford whatever synergies that these combined businesses generate.
One thing of which Jana is clearly convinced, though, is that the retail business would have more value if it was on its own. While Jana and Agrium can't agree on where that valuation should be, one look at the valuations in the stock market suggest that retailers do, indeed, command higher multiples than fertilizer producers in the current environment, as weakening global fertilizer prices have hurt values.
Yet spinning off the retail business might also make the fertilizer business look more attractive – for its takeover potential. The fertilizer industry is undergoing a global consolidation, amid a bullish long-term outlook for global agricultural needs. The companies who want to lock up long-term fertilizer and other agricultural-products assets are willing to pay top dollar (witness the $39-billion BHP Billiton Ltd. offered in its failed attempt to buy Potash Corp. of Saskatchewan Inc.), but are less interested in the retail side (witness Glencore International PLC's plan to unload retail assets in its planned acquisition of grain handler Viterra Inc.).
Agrium's counter-argument to all this – and analysts who follow the company tend to agree – is that the integrated business is ultimately an attractive, stable investment, with one side of the operation naturally boosting profits when the other side is hurting. And Agrium has been backing up its philosophy with heaping helpings of generosity to shareholders lately – in the past month it doubled its dividend and spent $900-million on a share buyback. That might be enough to buy Agrium the benefit of the doubt from investors for a while longer, and keep Jana at bay.
David Parkinson