We recently highlighted an increasingly tense standoff between Agrium (AGU) and its largest shareholder, activist hedge fund Jana Partners. The situation has evolved since then, but in short, Jana is pushing for the company to spin off its retail unit into an independent company in order to unlock significant shareholder value. The company has resisted the move and Jana is now pushing to get 5 new members of its choice elected to the company’s board of directors. For additional information on Jana’s thinking, check out its dedicated website with all of the fund’s Agrium-related presentations, analysis and press releases.
The situation got a bit more intense this week when Agrium’s CEO Michael Wilson began publicly addressing the issue in several different forums. First, the WSJ published an interview with Mr. Wilson on Monday in which he called Jana a ‘distraction’ and expressed regret that the company has “Jana in our stock.” He also made the company’s position on a potential retail spinoff pretty clear:
If you split retail from the rest of [Agrium], it would destroy shareholder value. If you blindly took your working capital down so you could buy back shares to the point where it affected your [margins for earnings before interest, taxes, depreciation and amortization to revenue], it would destroy shareholder value. If you stopped all your growth activities, it would destroy long-term shareholder value, absolutely…
The integrated model has huge value for us. From a wholesale point of view, it gives you greater operating effectiveness and efficiency. As an example, we run our potash and phosphate business at a higher capacity utilization than our competitors because when potash supply is in a surplus position, we have the ability to push a large amount through our retail [operations to be priced at market levels]. You’ve got supply-chain efficiencies as well as the opportunity for growth.
Within the same interview, Mr. Wilson defended its current board of directors and their experiences arguing that it doesn’t have any shortcomings in the retail space.
Agrium then hosted a sell-side analyst day yesterday which was mostly dedicated to the retail division and supporting its position. The presentation, commentary and Q&A drilled deep into the business and there was even an entire section led by Mr. Wilson devoted to rebutting Jana’s claims. I highly recommend anyone looking to invest in this situation or just interested in the hullabaloo to listen and go through it in depth. The webcast can be found here and the presentation here.
The situation has been going on for quite some time now and is increasingly getting more ‘personal’ and more acrimonious. For proof, here are some of the more ‘choice’ comments that Mr. Wilson made about the fund and the situation. These are all taken from transcript, but at times I did group together some quotes from different locations.
Here is Mr. Wilson discussing why he won’t just make a deal with JANA or accept even 1-2 directors:
And I get questions like, “Mike, why don’t you just embrace them, for God’s sake? Why don’t you make a compromise, let’s get this thing over with?” Well, the answer is, their prime objective is to split our company. That is the wrong thing. That’s huge value destruction. Their views on working capital, operating costs, operational rationalization, on governance, they’re all wrong. They’re flawed..
The bottom line is they look at us and in essence say we’re incompetent. I would put this management team against anyone in the world. And you listen to our Retail guys and you look at our performance…
I’m amazed, they have no idea how to run retail. And yet, they’ve got such strong opinions and yet, they don’t phone us and talk to us and say, “Hey, I’ve got these strong opinions on how you can rationalize your assets.” A phone call would likely be nice and we could say, “Guess what, we agree. You need to be rationalizing assets.” And we do it…
Needless to say, their prime objective is to split our company. And we spent a lot of time telling them it doesn’t make sense, and they just don’t seem to get it….
Question is, why not? It’s easy. Just, for God’s sake, Agrium, just accept what they’re saying. Why not take on their board members? Our board’s done an incredible job. Our board has helped us oversee where we’ve taken this company. We’ve grown total shareholder return by 480%. Not bad. And our board is very actively involved. Our board talks to us when we talk about continuous improvement. When we hired, twice, someone to come in and look at our G&A, just to make sure we weren’t missing anything, our board was part of that. When we hired someone, 18 months ago, to come in and look at our working capital, our board is part of that. They’re doing a great job. Our Retail, as far as I’m concerned, is run extremely well. No one can touch it, from a competitive point of view, and we’re keeping — continuing to grow that business. The other reason why not is they’re trying to break up our company. They’ve got ideas that are value destroying. And I guess the last point is, if you’re a first-class company with strong performance, why would you try to bring someone on your board who says your strategy’s flawed? You don’t know how to not operate it. And oh, by the way, through implication, your people are pretty incompetent. That’s the why not.
On Jana taking credit for several corporate actions:
I’m amazed they’re taking credit for all the actions we’ve taken…
Oh my God, all of a sudden, we did a dividend because JANA came along, and a share buyback. We’ve been talking to the Street about our priorities for cash for a long time. And we’ve said, as we grow our stable component of the business, we’ll increase our dividend, and we started doing that in 2011 before JANA came along. Look at our share buyback that we just did, the $900 million, it’s related to our Viterra acquisition, it’s related to the Medicine Hat sale, they had nothing to do with that. So I’m amazed they’re taking credit for all of that.
and some of his thoughts on Jana’s tactics & presentation:
One thing I’ll say about JANA is, it’s a process for them. And I’m not sure whether it’s JANA or it’s an activist. Now they’ll say one thing and do the opposite. And a classic example is, early in the game, when I was going to be a hero and I was going to get very rich, and this was going to be kept very quiet. Well, we had dialogue and we were dialoguing. We agreed it wouldn’t be public, and then they’re out talking to our shareholders on sell side. And when I made the call and said, “By the way, what are you doing, you’re talking to our shareholders on sell side, I thought we agreed we’ll have a discussion on your ideas?” And the answer was, “Mike, it’s just part of the process.” Understand, they’re going through a process. They’re good at it. They’re good at breaking up companies. They’re very good at, as they backtrack, saying — getting to, why not? Why not just engage some ideas? The answer is, if we do, we’ll destroy value for our company, and we’re not about to do that…
The other thing that’s interesting is, when you go back to July, when we were talking to them, there wasn’t one mention about our board. One mention about governance. And then all of a sudden, that seems to have appeared. They’re not getting traction on their other points.
This is the one that I sort of smile at. These guys are good. These guys are professional. It’s a process for them. They love words like midnight comparable. And people, even in this room say, “Oh, jeez, that’s a nice little catchphrase, let’s pick that up.” And they like words like switcheroo. I saw that on the last one, I thought, well, that’s interesting. Well, here’s a good example, switcheroo. This is what they said in July, this is what they said in October, and this is sort of where they are last week. In July, $34 was coming from splitting up our company. No explanation of where that was coming from, 70% of it, huge, huge number. They weren’t getting a lot of traction on that, and it was $17 coming from — we just don’t know how to run it. Given that they weren’t getting traction, guess what, in October it dropped. Dropped by almost $20. Still splits the company, but they had to keep that $50 there because that’s the big prize. That’s going to get the sell side and the shareholders’ attention. So guess what? Now it’s $30, we don’t know how to run a company. And if you look at January, nah, they sort of backtracked a little bit more. Don’t really have anything.
If you look — Mark, can I flip this? I just want to show you — when I was listening to Rich and the team, I sort of sit back and say, if we’re missing $30 of operating, we’ve got to be pretty damn incompetent. And you’ve got to be sitting and looking at us and saying, “Why not embrace their ideas?” Well, if you look at it, it starts with things like environment health and safety. When I look at a company, when I look at an acquisition, you can tell the culture of the company if you look at the way they treat their employees. And if they’re not treating their employees the way they should, if they’re not embracing continuous improvement, and we do it in every aspect of our business, then there’s low-hanging fruit for someone who really knows how to do it. And if you look at our continuous improvement, in total recordable incidents, our continuous improvement over this whole period, in safety, while we’re absorbing — we started out with 1,000 people, we’re sitting now with 11,000 people. And we picked these guys up. They were 3X worse than us on TRI, and we brought them in and at the same time improved year-over-year. This is a management team that embraces continuous improvement…
Apparently, we should look at rationalizing our assets. I know there’s some people out there who haven’t talked us, have never worked in the business, but they’ve got some pretty strong views on what we should be doing. Well, guess what? We do it. We’ll continue to do it. We do what’s right. Apparently, we should embrace continuous improvement. We should look at improving. Look at our revenue per facility. Look at our EBITDA per facility. If you don’t think that’s continuous improvement, I sort of wonder where you’re coming from.
and his ‘bottom line’ question to investors:
And I guess the question to you is, who do you want running this business? Some team that JANA has, that apparently is going to generate billions of dollars of value or this team?
Of course…he did have something positive to say about the fund:
I’ve tried to figure out what JANA did right. And they have done something right, they invested in Agrium. Likely the best investment they’ve made in a long damn time.
and this isn’t even all he had to say. Jana immediately responded by firing off a press release sarcastically ‘welcoming’ the company to the debate and attacking its arguments and claims. Here are some of their initial comments (they promise more to follow):
Dismissal of the Board’s Role: In an interview published today in advance of Agrium’s
presentation, CEO Michael Wilson dismissed the need for relevant industry experience
on Agrium’s board, saying it was not one of his “prerequisites.” In response, JANA
today noted first that it was the job of shareholders to choose directors to oversee
management, not the job of management based on their own selective criteria. JANA
then noted that it would be impossible for Agrium’s board to properly fulfill this
oversight responsibility without new directors with real distribution industry experience.
Thin-Skinned Response, Misleading Claims: Repeatedly today, Mr. Wilson claimed that
JANA seeks to replace Agrium management. In fact, JANA has called for better
oversight of management to boost value for all shareholders, and noted that management
should welcome highly-qualified directors with relevant experience and a fresh
perspective to help Agrium live up to its full value creation potential.
Mischaracterization of JANA’s Analysis: While Agrium claims that JANA’s focus on
poor corporate governance is a shift from its initial analysis, JANA noted that the events
it has cited as evidence of governance issues (including the comparables “switcheroo”
and botched shared repurchase) in fact occurred after JANA’s initial analysis.
Distorted Analysis: While JANA intends to respond in full to today’s presentation, it has
already identified numerous issues with Agrium’s analysis, including margin analysis
based on flawed metrics, cherry-picked examples, clearly contradictory statements, and
other problems JANA will respond to in due course.
Definitely more personal and acrimonious. The allure of a significant return is certainly enticing to investors and Jana does have a strong track record of delivering results. The fund may well be right in its ability to deliver excess returns, but it is also easy to see why management is upset. They feel disrespected, are now spending tons of time on non-operating related business and all this while the stock has performed pretty well. Definitely not simple, but there have been some more general benefits though such as greater insight into the business and an increased discussion about shareholder value.
While most of the workings (meetings with investors etc.) are taking place behind closed doors, based on the palpable anger (and selected comments) from management and the forceful response I would guess Jana is having some success resonating with investors. This situation is hardly over though and it remains to be seen whether Jana will succeed in forcing its agenda and board members on the company. That would certainly be interesting. We will keep you updated as the fireworks continue to fly.
Disclosure: Author holds no position in any stock mentioned.
- Shareholder Jana says Agrium presentation lacking (uk.reuters.com)
- Splitting Agrium would destroy value, CEO warns (theglobeandmail.com)
- Agrium goes on offensive to fight off activist Jana (business.financialpost.com)
- Jana Chides Agrium Over CEO Comments (blogs.wsj.com)
- Agrium Says No Reason to Compromise for Jana Partners – Bloomberg (bloomberg.com)
- Agrium fires back at Jana’s plan to split company (business.financialpost.com)