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Jana Partners: Agrium Breakup Is Shale Boom Bet


Jana Partners, a hedge fund with an activist investing bent, is adding to its bet on a shale drilling boom and its case for a breakup of fertilizer giant Agrium (NYSE:AGU) in the same breath.

Jana disclosed a $500 million-plus investment in Agrium in mid-August and said in a letter to the Calgary-based company's board that it should consider splitting its retail business from a much larger wholesale business, unlocking hidden value in the conglomerate.

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Doubling down on the investment thesis, Jana chief executive Barry Rosenstein said at the Value Investing Congress on Monday that he will continue to push for a wholesale and retail unit split, noting that a shale drilling boom has significantly lowered the input costs for Agrium's nitrogen and fertilizer businesses on the wholesale side of the operations.

The hedge fund investor said Agrium's retail business could be worth $15 to $20 per share independently and that, in total, Agrium may be undervalued by $50 a share as a result of its conglomerate structure.

Agrium shares rose between 2% and 3% in late afternoon trading on Monday, adding to year-to-date gains nearing 60%. The company's shares hit a 52-week high in the early afternoon as the Jana Partners CEO was speaking at the conference, at above $107.

Rosenstein said as a result of lower natural gas input costs and the company's overall scale, "Agrium operates at a structural advantage" to its peers. He again pressed for a split of a retail business catering to food retailers and farmers from a more commodity-price sensitive wholesale nitrogen and fertilizer business to fully show the company's advantages. Agrium's retail business accounts for 30% of Agrium's forecast 2012 earnings before interest taxes depreciation and amortization [EBITDA], while its wholesale accounts for the remaining 70%.

On Aug. 14, Jana disclosed it held 6.5 million shares of Agrium valued at $575 million as of June 30, according to a filing with the Securities and Exchange Commission. With the disclosure, Jana unveiled the logic of splitting Agrium's retail business from wholesale; however, a separate statement from Agrium dismissed such an action.

Jana's investment thesis on Agrium is notable both for the fund's recent success in tapping a shale gas drilling boom, and in its success in advocating for the breakup of conglomerates like McGraw-Hill (NYSE:MHP).

In late March, the fund reported it had sold off a successful investment in refiner Marathon Petroleum (NYSE:MPC) after the company's stock gained significantly on a refining sector rally and its decision to IPO a pipeline unit that Jana said could achieve a higher value independently.

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Jana was also one of the largest investors in pipeline and shale oil drilling giant El Paso, which was bought by Kinder Morgan (NYSE:KMI) in the largest acquisition of 2011. Both investments underscore the fund's familiarity with energy investments and corporate actions as it now tries to profit from second-order benefits from the shale drilling boom.

At the IMN Active-Passive Investor Summit on April 30, David DiDomenico, a partner at Jana, said that the fund targeted Marathon Petroleum because of the value in the company's logistics and midstream operations, highlighting the impact of shale oil and gas on margins. "In Marathon, what we saw was the perfect mix of assets that we wanted to invest in." DiDomenico said that the company's midstream business will profit from a US energy boom based on shale discoveries, representing 35% of the company's earnings, roughly triple current estimates.

Jana made its investment in November on the heels of Enbridge Energy Partners' (NYSE:EEP) decision to reverse the flow of the Seaway Pipeline in the US after buying it from ConocoPhillips (NYSE:COP). The dip in the spread between WTI crude and Brent crude as a result of the pipeline reversal and a drop in refiners gave Jana Partners a value entrance into Marathon Petroleum's stock in the low $30s, said DiDomenico, at the IMN conference in April.

Jana also found itself on the right end of a trade in Barnes & Noble (NYSE:BKS) after unveiling a 12% stake in April. The bookseller announced in late April that it was spinning off its Nook business with Microsoft (NASDAQ:MSFT), which was taking a 20% stake, a deal that valued the e-reader unit at $1.7 billion and helped to stabilize the bookseller's shares.

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