A storage tank stands at Agrium Inc.'s Carseland Nitrogen Operations facility outside Calgary, Alberta, Canada, on Monday, Aug. 23, 2010.Bloomberg
Jana Partners, a hedge fund from New York, received a firm "no thanks" from Agrium Inc. after it proposed the Alberta-based fertilizer producer split up its retail and wholesale businesses on Tuesday. So far, at least a couple of analysts agree that rejecting that idea was the right move for shareholders.
Joel Jackson, an analyst at BMO Nesbitt Burns, issued a note regarding Agrium on Wednesday saying that, at the moment, he believes a successful separation of the retail business to be improbable. "Our sense is that Jana and supporters will be challenged to convince a broader shareholder base to support a split-off, and would need to table more compelling arguments than what has been disclosed so far," he wrote.
The reasons he believes the split is unlikely parallel the points raised earlier this week by Globe and Mail writer Boyd Erman. Agrium's management is respected, the stock has been a champ rather than a dog, and the possible sum-of-the-parts valuation causing the stock to rise 15 to 20 per cent might not be worth the turmoil at the company. Plus, with so few comparables in the field, it's hard to stamp a valuation on the retail side of the business. "We continue to believe that retail is undervalued and this process could help unlock this position and hopefully encourage management to provide more disclosure/metrics for retail going forward," Mr. Jackson wrote.
But not only could a split be unlikely, RBC Dominion Securities analyst Adam Schatzker suggests the divide may not be in the best interests of shareholders. "Although some investors may be tempted by the short-term potential of a split-up, we believe that management is determined to continue its current strategy which we think will generate significant returns to shareholders," he wrote in a report, noting that RBC maintains its outperform, average risk rating.
He went on to say that there may be a risk of a lower multiple for Agrium's wholesale business if the split were to take place, and that "the discussions that have been triggered by Jana's statements may themselves help improve the [retail] valuation without the need to divide the company." Jana revealed yesterday that it's ownership of Agrium is up to 4.1 per cent.
Barclays Capital analyst Matthew J. Korn also initiated coverage of Agrium today (as well as other companies in the fertilizers and agriculture industry), and said in a statement he was looking for the company to outperform – that's thanks in part to the recent drought.