Agrium Declares, 'We're Not Broken'

By BEN DUMMETT

Jana Partners LLC disclosed last summer that it had acquired a big stake in Agrium Inc., a Calgary, Alberta, agriculture company, the second recent high-profile attack in Canada by an American hedge fund. Activist investor Bill Ackman had just won his proxy battle over control of another Calgary-based company, Canadian Pacific Railway Ltd.

But unlike Canadian Pacific Railway, Agrium's shares had done well, making less of a case that big changes were needed at the company, which has an array of businesses, including mining potash for fertilizer and selling seeds to farmers.

Since Jana made its announcement, Chief Executive Michael Wilson has come out swinging, saying outside proposals for boosting value—including spinning off the company's retail businesses—won't work.

He is slated to make that case to Wall Street on Monday. Agrium last week bumped up its forecast for fourth-quarter earnings, citing strong performance in its retail business, mostly in North America and Australia.

Jana says Agrium can unlock value by considering splitting off that business. The hedge fund also is pushing to replace five board members in a proxy vote, likely this year, and is calling for stock buybacks and dividend increases.

In an interview last week, Mr. Wilson, 61 years old, called the matter a "huge distraction" that threatens to erode shareholder value, not boost it.

Edited excerpts:

WSJ: Did you and Agrium's board learn anything from CP's experience with Bill Ackman that is helpful dealing with Jana?

Mr. Wilson: We look at a number of activists' activities to see what their motives…tactics [and] strategies are, and we've obviously done that. In some cases, [activism] adds value and it's useful. In other cases, it could lead to destruction of shareholder value. 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.

WSJ: Has Jana's activism benefited Agrium and its shareholders in any way?

Mr. Wilson: It's unfortunate we have Jana in our stock. They have a mandate to split our company. They went out with that mandate, and they got very little traction with our shareholders [and] with the sell side. So, their approach changed to one of challenging the credibility of management [and] our board.…We've generated greater shareholder return than our peers. Our board is recognized for its governance and oversight. Our company certainly isn't broken.

WSJ: Jana wants to replace five Agrium directors with its own representatives, citing a lack of retail experience. Does the current board have any shortcomings related to retail?

Mr. Wilson: No. A board member isn't supposed to micromanage the company. What our board does is challenges us: "Are you understanding your costs?" "Are you embracing continuous improvement?" "Are you looking at working capital?" We've hired outside consultants to do a cold-eyes review of general and administration costs twice in the last five years. A company that is closed-minded doesn't do that.

WSJ: Will retail experience be a prerequisite for your own choices to fill upcoming vacancies?

Mr. Wilson: It's not a prerequisite. The ideal candidate is someone who has been involved in a growth company, has some international experience, some financial background, either some commodity or retail background, and has some supply-chain background. You will never fill all those boxes and so you sit back, and take the most you can get.

WSJ: Would Agrium consider any of the directors proposed by Jana as successors to retiring directors?

Mr. Wilson: That is a potential.

WSJ: Jana wants you to spin off retail operations. Does that fit with your strategy?

Mr. Wilson: 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.

WSJ: Jana says it can generate US$50 per share of extra value for Agrium. Is that possible?

Mr. Wilson: When we met with Jana the first time, the majority of the US$50 came from splitting our company, and the rest came from share buybacks and [running] retail as well as we should. Since they've gotten very little traction on splitting the company, they've now morphed it to "management isn't capable of running the company and the board isn't doing its job."

WSJ: What's your view on Agrium's need to return cash to shareholders?

Mr. Wilson: The priorities for our use of cash are: No. 1, preserve shareholder value…by sustaining your assets, your dividend and by keeping, in our case, an investment-grade balance sheet. The No. 2 [priority] is accretive growth. The third is to return excess cash to the shareholders in the form of increased dividends or share buybacks, and we've done both.

Write to Ben Dummett at Ben.Dummett@dowjones.com