Agrium, Jana face off over retail

Fertilizer dealers worried | Jana pushes for changes, including spinning off retail outlets

An attempt by Agrium’s largest shareholder to spin off the company’s retail arm has caught the attention of farm groups concerned about vertical integration in the fertilizer industry.

Jana Partners LLC announced last week that it is attempting to get five handpicked candidates elected to Agrium’s 11-person board of directors.

Jana is a fund manager with $3.5 billion in investments and commitments, including a six percent share of Agrium.

It has expressed concern with the way the fertilizer company is being operated and is pushing for changes, including spinning off the retail side of the business.

A Globe and Mail article shows that Jana is not shy about making demands and often gets what it wants, but Agrium’s president said that won’t be the case this time around.

Agrium has invested more than $4 billion in farm input outlets, starting with the 2008 purchase of UAP Holding Corp.

The company is attempting to add to that network with the purchase of 232 of Viterra’s crop input businesses. The deal is still subject to approval, including a review by Canada’s Competition Bureau.

The Viterra deal would give Agrium 42 percent of Saskatchewan’s agriculture retail business in addition to 53 percent of Canada’s ammonia production capacity and 49 percent of the country’s urea production capacity.

That level of vertical integration has spooked some farm groups, including the Saskatchewan Canola Development Commission.

Commission chair Brett Halstead said the Jana proposal to create a retail business that is a separate and distinct entity from the wholesale business somewhat eases those concerns.

SaskCanola is worried independent fertilizer dealers would be squeezed out of business by a competitor that controls a large portion of both the retail and manufacturing sides of the fertilizer business, which would lead to less competition and higher prices.

A senior official at Agrium has assured Halstead that the company produces far more fertilizer than can be sold in its own retail outlets, so there is no incentive to squeeze out the independents.

“I guess I kind of take him at his word, but (separating the retail and wholesale businesses) would still give me a little more comfort in the end,” he said.

Halstead said in a perfect world farmers would benefit from the synergies realized by Agrium’s vertically integrated fertilizer business.

“The reality is that doesn’t really get passed along to producers. It’s probably more likely to get passed back to shareholders,” he said.

Jana claims the true value of the retail portion of Agrium’s business is being undervalued when crammed together with wholesale. Retail is typically a more stable, higher cash flow business that trades at higher share values than the wholesale business.

The fund manager said the company’s retail business appears to have trouble achieving Agrium’s minimum after-tax return hurdle of nine percent.

It said many of Agrium’s competitors operate without retail distribution arms because they don’t see any value in integration.

Jana claimed the problem is being exacerbated by Agrium’s poor disclosure of the retail side of its business and a board of directors that lacks true retail experience.

Jana said its slate of directors has extensive retail experience. It also includes former federal agriculture minister Lyle Vanclief.

Agrium president Mike Wilson said the company remains committed to its integrated strategy.

“Jana has been trying for over six months to obtain support for its idea that Agrium should spin off or sell its retail operations,” he said in a news release.

“Agrium’s shareholders have overwhelmingly rejected Jana’s ideas. As a result, we believe Jana’s attempt to run its own slate for Agrium’s board is almost certain to fail.”

Wilson said the breakup of Agrium would destroy shareholder value. The directors of Agrium’s board spent two months evaluating Jana’s proposal before unanimously rejecting the idea.

“Shareholders have told us that they invest in Agrium in part because they want exposure to retail and the advantages of our integrated model,” he said.

Jana’s slate of directors will be accepted or rejected by shareholders at the company’s annual meeting in mid-May.

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