JANA PARTNERS ISSUES NEW INVESTOR PRESENTATION ABOUT AGRIUM, CALLS FOR CHANGES
Mar. 21, 2013
Source: JANA Partners news release
JANA Partners today released its new investor presentation to the leading proxy advisors making the case for its nominees for the board of Agrium Inc. ("Agrium") (TSX / NYSE: AGU). The presentation is available at www.JanaAGUAnalysis.com and addresses these key issues:
1. Is Change Warranted at Agrium?
Yes. While Agrium points to its return since embarking on its current integrated strategy as proof that no change is needed, JANA's analysis makes the following points:
Measurement Period. Agrium cites a 467% return for its strategy using a 7 1/4 year measurement period, starting on the date it launched a hostile tender offer for a company. This offer had to be extended 5 times and required 2 separate price increases to complete after Agrium threatened to abandon the offer, meaning it was far from certain to close on this date.
Using this initial tender as the measurement start date benefits Agrium's return because it coincides with Hurricane Katrina which led to record high prices for natural gas (the primary input for Agrium's largest business, Nitrogen), temporarily depressing Agrium's stock price.
By the time its tender offer had sufficient support almost 3 months later, gas prices had fallen and Agrium's shares had recovered. Agrium's end date also includes the impact of our involvement. Adjusting these dates reduces the return from 467% to 213%.
Relative Underperformance. Even using this non-standard measurement period, and using its own selected peer composite, Agrium has underperformed its potential given that the company's peer-weighted composite rose 817% during the same period.
The same is true over more standard 5 and 3 year periods. In addition, Agrium's return on capital, which is a key indicator of strategy performance, has been cut almost in half from the start of Agrium's measurement period.
Commodity Tailwinds. JANA highlights the beneficial impact of falling natural gas prices on Agrium's share price, and notes that in the last 5 years Agrium has not delivered the benefit that would have been expected based on the North American shale gas boom alone.
2. What Changes Would JANA's Nominees Bring?
Pursuing Opportunities for Improvement: JANA believes that by addressing issues like high costs in Retail, growth in overhead, low returns on capital, insufficient capital return, misaligned management incentives and other aspects of JANA's "5 C's" analysis, Agrium can unlock substantial unrealized value for all shareholders, and that JANA's nominees bring the experience and shareholder mindset needed to help the board do so.
Structural Review. While Agrium argues that we are secretly focused only on a "break up," we have been open about our view on Agrium's conglomerate discount and that a fair and independent review of Agrium's structure is required given the flaws in its initial analysis. Our nominees, who would be a minority of the board, would make their own decisions following such review in accordance with their fiduciary duties and based on all the facts. None of them have any desire to destroy value at the company, which would also destroy the value of their own substantial investments in Agrium.
3. Why Are JANA's 5 Nominees Qualified?
While recent board additions have agricultural industry experience, the board still lacks relevant distribution experience. Three of our nominees (Mitchell Jacobson, Stephen Clark and David Bullock) have this experience, and we believe that having at least 3 directors out of 12 with such experience is appropriate given that almost 1/3 of Agrium's profits (and more of its value) comes from Retail.
The other nominees (Barry Rosenstein and the Hon. Lyle Vanclief) bring large shareholder representation and the perspective of Agrium's farmer customers, respectively, both of which the board lacks.
Agrium argues that proposing 5 nominees is disproportionate to JANA's 7.5% position, even though only one is a JANA principal. This represents a misunderstanding of shareholder democracy given that, if elected, the new directors would represent all shareholders.
Agrium's board owns less than 1% of Agrium's shares, and has nominated every current board member. There is nothing "disproportionate" about that because shareholders elected those directors.
Saying that directors represent all shareholders if they are nominated by the board but only represent one shareholder if nominated by that shareholder creates an unfair obstacle to shareholder nominations and would unwisely limit the pool of board talent from which shareholders have to choose.
Agrium argues, however, that the 4 nominees who are not JANA principals are not "independent" because, in addition to their substantial personal Agrium investments, they are entitled to an incentive based solely on share price performance.
We believe that director alignment with shareholders is entirely consistent with good governance. In addition, several Agrium directors, including its CEO and its Chairman, are current or former directors of companies with a director who receives direct compensation from a shareholder of that company, none of whom are perceived to have an impermissible conflict.
By contrast, these JANA nominees only stand to benefit if all Agrium shareholders benefit, and each will owe no duty to JANA, only to Agrium.
The 3 year terms of these incentives do not create undue short term incentives, particularly given that they are separate from our nominees' substantial investments, which will presumably grow. In fact, many current Agrium directors have made substantial outright share sales during their tenure.
Two current Agrium directors will also see the majority of their equity at risk cashed out if they retire on schedule in the next few years, but presumably the board does not believe they are only focused on that time horizon.
We also note that Agrium's argument depends upon a distortion of the "independence" requirements applicable to directors. In every applicable regulation, including Agrium's own corporate governance guidelines, "independence" is defined by examining a director's relationship with the company, not with shareholders.
This is because directors need to be independent of the management they oversee, while alignment with all shareholders is not a conflict but a positive.
"This debate comes down to whether Agrium's board would benefit from the experience and focus on shareholder value that our nominees would deliver on behalf of all shareholders," stated JANA Manager Barry Rosenstein. "We believe the answer is clearly yes, and we look forward to continuing to make our case for value-creating change."
JANA URGES FELLOW SHAREHOLDERS TO VOTE THE BLUE PROXY CARD OR VIF FOR ITS EXPERIENCED AND INDEPENDENT BOARD NOMINEES