(Reuters) - Activist investor Jana Partners LLC, the biggest shareholder in Canadian fertilizer company Agrium Inc (AGU.TO), chastised the company in a private meeting on Wednesday over a recent change in how it compares its retail performance against other companies.
Jana, a New York-based hedge fund that owns a roughly 5 percent stake, believes that Agrium can create greater value for shareholders by separating its farm retailing network from its wholesale fertilizer production business.
Agrium has rejected the idea.
Agrium sent an email this week to sell-side analysts who follow the company in which it advised them to value the company's retail operations against a different set of companies than it previously used, effectively lowering the business's potential value as a stand-alone operation.
As a result, Agrium now recommends comparing the retail operations value to that of companies which trade on average at slightly less than eight times forward EBITDA; the previous set of comparable companies trade at more than nine times the expected earnings before interest, taxes, depreciation and amortization, according to Jana.
"There was a spirited discussion about the correct set of multiples used to value retail," a source at Jana said about Wednesday's meeting in New York between Agrium and the hedge fund. "We obviously disagree with their selection. It strikes us as slightly gimmicky that after years of using those comps, they're switching to comps that trade at a lower multiple."
The question of how to value the potential share trading price of Agrium's retail division is key to the debate about whether to spin it off as a separate company. There are no publicly traded farm retailers to offer an easy comparison.
Agrium spokesman Richard Downey said the company advised analysts on the change in comparables once news broke that Jana was agitating for change. The company changed its basis of comparison for its retail division after Jana raised the idea of spinning it off, resulting in a broader, more accurate set of comparables, he said.
"We hadn't really done that much work on it, so part of the process the board went through was to hire an outside firm that specialized in this," he said in an interview. "There was nothing untoward, it's what the board is supposed to do."
In its email to analysts, Agrium said the new set of comparable basic material companies offer a closer comparison with Agrium's retail operations than the previously used general industrial distributors.
The result of a spinoff would be "virtually no upside for our shareholders, and that is before considering the loss of the strategic and financial benefits associated with the combined businesses," the company wrote in the email obtained by Reuters.
After the meeting, Jana managing partner Barry Rosenstein sent a letter to Agrium's board of directors to protest the change in retail benchmarks.
"We have watched in disbelief over the last few days as the management of Agrium has taken a scorched earth approach to avoid any reasonable discussion of our proposals to unlock the true shareholder value potential of the company," Rosenstein wrote.
Far from it, Downey said. Agrium has set up an independent committee and hired an adviser to examine Jana's points in detail, not tried to avoid discussion.
"The only accurate statements in Jana's letter are that Agrium is not going to spin off its retail business and that Agrium is always open to looking at ways to improve operating performance," he said.
Jana and Agrium, which was represented by Chief Executive Mike Wilson and bankers Morgan Stanley, also had a constructive discussion at the meeting on ways to improve the operating performance of the retail side, although no decisions were taken, the Jana source said.
Agrium's shares on Wednesday closed at C$97.71, near the 52-week high of C$98.16 hit on July 19.
Reporting by Rod Nickel in Winnipeg, Manitoba and Euan Rocha in Toronto