From Agrium's perspective, a campaign by Jana Partners to break up the Canadian fertilizer company is effectively dead in the water. But the $3.5 billion activist hedge fund believes it is only getting started.

Jana's five-month-long agitation has put a spotlight on the $17 billion market cap company, which produces nutrients such as potash in bulk and sells fertilizers directly to farmers.

Shareholders are taking notice as both Agrium and Jana work the phones and hold meetings to make their respective cases, according to investors and sources close to Jana and the company. So are some rivals and private equity firms that are curious to see if Jana's battle throws up an opportunity for them to do a deal, sources close to those firms said.

Jana has made a number of demands, including that the Canadian company spin off its retail arm, return capital, cut costs and improve disclosure - moves that it says will add about $50 per share in value.

The company, for its part, has raised its dividend this year and just completed a share buyback, and its shares have risen by more than half this year - which each side says bolsters its own case for what's best for the company.

Agrium and Jana also have diametrically opposite views of the evidence that is emerging from their behind-the-scenes blitz with shareholders, indicating that the activist investor may have a long, protracted battle on its hands. Jana is Agrium's largest shareholder with a roughly 4% stake.

Sources close to the company said most of the top 10 shareholders have told Agrium that they do not support Jana's idea to split the company by spinning off its retail arm.

The hedge fund, meanwhile, is not ready to go away. It believes "most shareholders want to see Agrium address the operational and structural issues we've raised," a source close to Jana said. For those who are not persuaded, the source said, the activist will "keep making our case for change as we've successfully done in other situations".

In the event of a proxy fight, sources close to Jana said it can field nominees to the board of directors well ahead of Agrium's annual shareholder meeting next year, after working with a number of industry executives on its analysis of the company.

Jana is among the top U.S. activist investors. In the past, it has won high-profile campaigns at companies such as Marathon Petroleum and McGraw-Hill Companies.

Campaign noise

Reuters spoke with seven Agrium shareholders. Five of them - including four who were among the company's top 20 shareholders as of June 30 - said they believed management should at least consider Jana's proposals. The other two said they did not believe Jana's arguments held any merit.

Separately in August, Montreal-based Letko Brosseau Investment Management, the company's No. 11 shareholder with a 1.6% stake, defended the management against Jana.

As is often the case around activist situations, Jana's agitation has also stirred very preliminary interest among some private equity firms and industry rivals in potential deals for parts of the company, but no one is yet willing to make an offer or even look further without Agrium's blessing, according to several sources close to those firms.

Private equity firms including KKR & Co, CVC Capital Partners, Clayton Dubilier & Rice and Bain Capital have made preliminary inquiries with their own bankers about the possibility of a deal for parts of the business, these sources said. They have not approached Agrium, the sources added.

Some of Agrium's rivals have put in "courtesy calls" to Agrium to gauge interest, two of the sources said. The rivals, including CF Industries Holdings, Mosaic, Yara International and Israel Chemicals, would be interested in Agrium's non-retail businesses, they said.

Those private equity firms and rivals declined to comment.

Calgary, Alberta-based Agrium has said its wholesale and retail businesses are more valuable together than apart, and its board has rejected Jana's call to break up the company.

The company has raised its annual dividend to $2 per share from 45 cents per share over the year, and last week completed a $900 million share buyback. The company's shares are up 56% since the beginning of the year, although that in part reflects a surge in grain prices after the worst U.S. drought in a half century.

From the company's perspective, the share price rise and return of capital should keep shareholders happy with its strategy.

Moreover, Agrium's shareholders told Reuters a relatively conservative Canadian investor base that is suspicious of American activist investors is also firmly in Agrium's camp, raising the bar all the more for Jana. About half of Agrium's top 50 shareholders were Canadian funds as of June 30, according to Thomson Reuters data.

" didn't measure the Canadian reaction to an activist who would suggest that management could be doing more for the shareholders," said one Agrium shareholder, a top 10 holder as of June 30.

Activist's fight

A U.S. based investor, who holds roughly 1% of Agrium's shares, said Jana's efforts to persuade other investors could lose steam if the company reports good third-quarter earnings next month and the stock continues to perform well.

For Jana, however, Agrium's moves are signs that it is making headway in getting the company to heed its demands. Jana argues that since it first started discussions with the company and other shareholders at the end of May, Agrium shares have risen about 35%.

The top 10 shareholder, who spoke on the condition of anonymity, said: "I think management has been stonewalling - it is an old-fashioned reaction. Let management show us that what Jana has suggested won't result in additional value in the pockets of a shareholder."

Agrium for its part has said it has given detailed arguments against Jana's proposals.

In August, Agrium said its board had spent two months with its adviser Morgan Stanley evaluating a spin off of its retail business. The bankers believe the company's retail business would likely trade around 8 times its estimated earnings before interest, taxes, depreciation and amortization as an independent company.

Information provided by the bank cites third-party research analysts as already valuing the business in the 7 times to 8 times range, "suggesting virtually no upside from a separation."

The bankers have also told Agrium's board that there is a risk that the wholesale business, if it were separated from the retail unit, could trade below the valuation that is implied in such a model, resulting in a lower value overall.

A sale is a worse option, these bankers argue. The retail business has a low tax basis, which would trigger a sizeable tax bill if Agrium were to sell it.

The sources close to potential bidders said the retail business, which has an estimated EBITDA of $900 million, could be valued around 9 times that profit for a potential $8 billion leveraged buyout, which would be by far the largest private equity transaction in the sector.

Jana has argued, however, that Agrium's management has been inconsistent on the valuation of the retail arm, noting that Agrium CEO Michael Wilson told shareholders at an investor event in 2011 that he believed the business should be trading at 11 times EBITDA.

"We think it is unconscionable that, after years of arguing that retail was undervalued based on where selected peers were trading, when we challenged them to address this undervaluation, the company suddenly switched to new lower multiple peers to argue the business isn't undervalued after all," one of the sources close to Jana said.