Barry Rosenstein, founder of JANA Partners, is currently speaking at the Value Investing Congress. JANA is a value oriented firm, with a track record of activist success. The hedge fund is up 11.2 percent for the year (as of June 30th). JANA takes both long and short positions. Based on our information, we believe the fund has been shorting Facebook Inc (NASDAQ:FB).
Below are live notes:
(See our full coverage of the Value Investing Congress here).
Rosenstein is starting off the afternoon session with a few comments on his overall approach and a more in depth discussion of his favorite new activist idea. Rosenstein currently manages ~$3.5 B
His overall approach is value + catalyst event driven approach. He looks for investments trading well below intrinsic value with multiple catalysts. Recently he has developed a reputation as a “friendly activist”, but their style really hasn’t changed over the years. The difference is companies have been more receptive to it lately.
2:07pm EST: Agrium Pitch
Agrium (AGU) is the topic for today, a current investment but one he has not fully discussed. A full analysis will be available later today in a white paper. Log onto www.Janaaguanalysis.com for more info
Within AGU there is the Retail and Wholesale business, each have different fundamental characteristics. The wholesale business for AGU is 70% of EBITDA and potash accounts for 25% of that segment. Historically low potash prices means that this segment is cyclically depressed. AGU in general is trailing its pure play peers over the last few years, with the two segments masking true value. The retail business deserves a higher valuation, but is hampered by the low multiple wholesale business.
The combination of retail and wholesale generate no synergies for AGU, and recently wholesale expenses have increased. Additionally AGU is failing to properly manage working capital in the retail segment. The company tried to ward Jana off with a dividend and dutch auction tender, but Rosenstein believes their is still additional capital to be deployed to shareholders. He believes there are company specific steps that can generate $50 of additional value, or a 50% upside to the current share price.
For the first time in Jana’s experience, the company is actually arguing that they are worth less than Jana proposes. The key is the valuation of the retail business, which management initially argued should trade for an EV/EBITDA multiple closer to 10x or 11x (in line with Tractor Supply). Now management is doubling back and arguing that the retail segment is worth less, blaming their investment bank. Rosenstein jabs that Morgan Stanley also brought us the Facebook IPO, so maybe they do deserve the blame. But overall he thinks AGU shareholders should not simply settle for “good enough”.
Rosenstein is stepping down now, a colleague from Jana is stepping up to go over a more thorough analysis of their work.
Retail is under-earning EBIT by ~35% , and running with more than $700mm in excess working capital. Due to poor retail disclosure, these issues have largely gone unnoticed. They believe agriculture is a great end market, and AGU is by far the largest agriculture distributor in North America. Compared to mom & pop competitors, AGU offers scale and stable free cash flow. Despite these characteristics, the retail segment trades at a significant discount to industry distributor peers. Jana does not believe conglomerate synergies exist, and cites prior work from Morgan Stanley bankers who discredited AGU’s conglomerate model while working for competitor CF Industries. Now MS is working for AGU, and is touting the conglomerate structure. As Buffett says: “if you pay an investment banker they will say anything”.
Overall Jana believes the conglomerate structures provides dis-synergies to AGU shareholders because running a retail and wholesale operation requires two different approaches and skill sets.
High working capital remains a concern, especially in the distribution business. The reason retail segments demands a premium is the benefits of well managed working capital. Due to poor disclosure, these problems are very difficult to uncover without extensive work and industry research.
AGU’s board lacks any directors that have any relevant retail or distribution experience. This makes little sense to Jana
Key catalysts for the stock that AGU can control:
-Committing to larger returns of capital
-Improving disclosure in retail
-Rationalizing corporate overhead and following an expense management plan
-Pursuing the separation of the retail and wholesale businesses
2:39pm EST: Q&A
First question: why is the company not doing everything to unlock value?
Rosenstein: if every company did what they were supposed to I would be out of a job
Second question: what proxy method is Jana planning?
Jana Partner: typically Jana uses their own proxy in an activist campaign, not the company’s proxy. Jana is usually working towards a wider set of changes, requiring their own proxy.
Question about their general activist process: Rosenstein explains that they always try to work behind the scenes first, giving the company an opportunity to work behind the scenes with Jana first. They only go public if the company resists Jana’s ideas.
Rosenstein has to run for a CNBC interview, his partner will field the remaining questions