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 improvement.
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 CEO.
"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.
· John Burbank’ Passport Capital purchased 153,600 in the second quarter of 2012.
· Scott Black’s Delphi Management and David Dreman 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 progresses.”
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 peers.
Jana Partners' Structural and Operational Issues with Argium
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 Retail.”
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 (NYSE:WCC) 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 stock.
About the author:
• Realized average annualized returns on self managed IRA account of 14% from January 2004 to December 2012 (total return 150+).
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