I recently wrote about the boardroom drama between Agrium (NYSE: AGU) and JANA Partners. To recap, JANA, a hedge fund, is Agrium's largest shareholder, and since last summer, it has been pressuring Agrium to spin off its retail division, increase dividends and share repurchases, and make other operational changes that JANA believes will unlock tremendous value for shareholders. According to recent filings, JANA has increased its stake in Agrium, and its board member candidates have also taken positions in the company. Combined, they now own about 7.6% of Agrium's stock.
But who is JANA, anyway? How does this situation compare with its previous investments?
A seat at the table
JANA is an event-driven, activist hedge fund. Its purpose is to determine whether a particular company may benefit from certain changes -- say, spinning off a retail division, or converting certain operations into tax-advantaged master limited partnerships -- and, if so, JANA takes a sizable position in the company and attempts to persuade management to make those changes. If it does, it reaps a profit.
Since Agrium's management hasn't been open to many of JANA's ideas, its new goal is to get a slate of boardroom directors appointed that can push management in the right direction -- ones that will be less of a rubber-stamp committee than the current board. Agrium has been aggressively campaigning against JANA, and while both sides have some valid points, Agrium has taken an absolutist stance and has essentially rejected all of JANA's ideas.
By the time my article had been published, the drama had flared up again. JANA and Agrium had been engaged in talks over a compromise that would give JANA a single seat on the board of directors, on the condition that JANA give up its very public campaign for changes at the company, which would sort of defeat the point. Those talks have now fallen apart, with Agrium claiming that JANA reneged on the agreement at the last minute and demanded two board seats instead of one, while JANA claims that Agrium reneged on the agreement by refusing to even consider any of JANA's proposals.
Agrium has instead announced the appointment of two different board members, one of which, a former executive at Deere, has no real retail experience, while the other is the former CEO of Viterra, another conglomerated agribusiness retailer recently acquired by Glencore. It's probably little coincidence that as soon as Glencore completed the acquisition in December, Agrium in turn acquired Viterra's retail operations from Glencore. To the conspiracy theorist, handing a board seat to the former CEO of a company Agrium just acquired, in a transaction that earned him more than $30 million, lends some credence to JANA's claim that Agrium "set forth a litmus test that such directors would not question management's prior performance or strategy."
Not to be taken lightly
This isn't JANA's first rodeo. The company has had great success with similar situations in recent years
In late 2011, JANA began discussions with Marathon Petroleum (MPC 0.70%) to make certain changes at the company. JANA’s proposal was to spin off its midstream and downstream operations, to return more cash to shareholders, and to restructure some of its operations to cut costs. Sound familiar?
Marathon Petroleum ended up taking JANA’s advice, promising a $2 billion share repurchase program and spinning off its midstream operations into a tax-advantaged master limited partnership called MPLX (MPLX 1.17%), which went public last October. An investor who bought shares of Marathon Petroleum after JANA’s involvement would have more than doubled his money by now, and MPLX investors have made a tidy profit as well.
To be fair, Marathon Petroleum’s performance is due more to a favorable WTI-Brent spread than any advice from JANA. Marathon Petroleum is itself a spinoff of Marathon Oil, and the pair of companies can be compared to competitor ConocoPhillips (COP 1.23%) and its own downstream-spinoff, Phillips 66 (PSX 0.91%). ConocoPhillips and Marathon Oil were both previously fully-integrated players, and both spun off their downstream operations at roughly the same time, making them ideal for comparison.
The two refiners have had nearly identical returns since, showing that downstream operators in general have benefited from favorable industry trends. Interestingly, however, Phillips 66 has made a $2 billion share repurchase plan, which is similar to Marathon Petroleum's, and will soon form a tax-advantaged master limited partnership around some of its midstream transportation assets, roughly the same ideas JANA proposed to Marathon Petroleum.
JANA also proposed a breakup plan to McGraw-Hill (SPGI -0.20%). This company had already been considering some type of breakup when JANA came along, so JANA can't really take all the credit here, but the company's stock had performed remarkably well after JANA announced its proposal in August 2011. At least it did until recently, when the federal government announced that it was suing Standard & Poor's, a division of McGraw-Hill, in a $5 billion fraud case.
The Foolish bottom line
In a bizarre move, Agrium recently moved its annual shareholder meeting up a full month. The move was announced a week ago Friday, after the market close, on a holiday weekend -- typically something a company would do to bury news that it don't want noticed. Moving the meeting gives JANA less time to make its case and shareholders less time to consider it. But I don't think JANA needs that extra month. Its case is strong and is backed up by an excellent track record. How the vote goes at that meeting will have a huge impact on Agrium's business, and its stock.
Editor's note: A previous version of this article incorrectly stated that Marathon Oil was pressured by Jana Partners to spin off Marathon Petroleum, when in fact the decision was made entirely by Marathon’s management team, lead by CEO and President Clarence P. Cazalot, Jr., and approved by Marathon’s board of directors. The Motley Fool regrets the error.
