Adam O’Dell | Friday, February 15, 2013 >>
They say, “If it ain’t broke, don’t fix it.”
Well… that’s everyone but activist investors.
This group of highly-informed investors is never content to passively glance at monthly account statements to see how their shares are doing.
These guys invest in companies with the full intention of rolling up their sleeves, digging deep into the inner-workings of the company’s bowels and affecting real change.
That’s how Warren Buffett made his fortune. He’d find undervalued companies, buy enough shares to earn a seat at the table and a voice in the boardroom… then work to fix the company’s flaws.
The thing is, activist investors typically only target fundamentally flawed, weak performing companies. It’s far less common for activist investors to target companies that are performing well… like, a stock that gained 40% in 2012… or 205% in the last four years!
But that’s exactly what’s happening right now and it’s turning into an epic battle…
The Canadian fertilizer giant… Agrium Inc.
The value-oriented “activist” investment firm… JANA Partners.
You see, JANA Partners first bought shares of Agrium’s stock in the second quarter of 2012. They grabbed 6.5 million shares in fact! This, they thought, entitled them to a seat at the boardroom table.
Agrium, of course, wanted nothing to do with JANA, or its detailed analysis of purported “flaws” in Agrium’s business model. So Agrium’s CEO, Board of Directors and PR staff initially ignored JANA’s unsolicited recommendations. And I don’t blame Agrium – you can’t give away your ground too early in situations like this.
JANA’s call-to-action to Agrium was simple: you owe shareholders a lot more money than you’re making us! Let’s fix your business model.
But JANA’s analysis and the supporting evidence substantiating its claim, is anything but simple. In fact, it’s very detailed, insightful… and aggressive.
It all starts with what JANA calls the “5 Cs.”
Now I have to say, I’ve always been suspicious of lists in which each item on the list starts with the same letter of the alphabet. I can’t help but wonder if the list’s author is more concerned with alliteration than actual content. But I digress…
JANA claims are actually quite compelling. They say Agrium would be a more profitable business, paying shareholders more handsomely, if it would address five key areas…
1) Cost Management
3) Capital Allocation
4) Conglomerate Structure
5) Corporate Governance
The details of JANA’s “5 C’s” recommendation could keep me writing several weeks’ worth of Survive & Prosper dispatches. But my editor squashed that idea pretty quickly. So, if you’re interested in learning all the gory details of JANA’s report, you’ll find it at www.janaaguanalysis.com.
What’s most important to note right here and now is that JANA’s persistence now seems to be gaining traction…
Act Two: Agrium Responds, JANA Yawns
JANA has steadily increased its stake in Agrium’s stock – up 40% from its original purchase of 6.5 million shares. It now owns 6.2% of all Agrium shares outstanding, making it the single largest shareholder of Agrium stock.
It seems that if 6.5 million shares doesn’t buy you a seat at the table… 9.1 million shares does.
Agrium has finally broken its silence, acknowledging the fact that JANA isn’t going away without a fight. The latest standoff revolved around shareholders’ election of new members to Agrium’s Board of Directors.
JANA criticized Agrium’s board for not having enough experience in the agriculture market, specifically in retail distribution, which JANA claims is Agrium’s weakest link. Of course, JANA submitted its own list of recommendations for board members, which Agrium promptly snubbed.
Now it’s turning into something like a daytime soap opera. Rumors are flying. Tempers are flaring. No one’s budging. But I think it’s just a bunch of posturing. These guys will eventually sit down and work something out, because, if nothing else, JANA has succeeded in creating a lot of buzz about Agrium.
By simply shining light on its business model and opportunities to unlock even greater shareholder value, JANA has succeeded in getting the conversation started.
Time will tell if Agrium can be won over by its new, uninvited business partner. That they’ve started to respond, and appease, tells me Agrium is one step closer to taking a real close look at JANA’s proposal. And they should. Shareholders deserve Agrium’s genuine, thoughtful review of JANA’s ideas. Sure, Agrium didn’t invite JANA to the party… but they’re here, and Agrium’s business model should be constructively challenged.
And if JANA’s analysis holds true, Agrium’s stock could be worth $50/share more than it is today!
That would make for some very happy Boom & Bust subscribers. I added Agrium to the Boom & Bust model portfolio last February… just one quarter before JANA jumped into the ring.
We grabbed the stock when it was trading around $82/share. With current prices above $110, we have a nice gain of 35% so far.
Editor, Cycle 9 Alert
P.S. In case you didn’t feel like doing the math, I’m anticipating a 44-plus percentage gain on the Agrium play in our Boom & Bust model portfolio.