Canadian fertilizer company Agrium said on Tuesday it would not take the "substantial risk" of spinning off its retail operations, as the company sought to fend off pressure from activist investor Jana Partners.

Jana disclosed on Tuesday that it had bought more than 6.5 million shares of Agrium, according to a filing as of June 30 to U.S. regulators. That makes the hedge fund the largest shareholder with about 4% of the company, North America's biggest retail supplier of agricultural products.

A source close to Jana said the investor had since added to its stake and now held nearly 5%.

Jana aims to convince the company to cut costs and spin off its farm retail distribution arm while improving operating performance, the source said, even as Agrium has produced bigger profits and seen its share price climb more than 40% this year.

"Agrium's board has carefully evaluated the idea of spinning off retail and has unanimously determined that it is contrary to the best interests of the company and its shareholders," Agrium Chief Executive Officer Mike Wilson said in a statement.

Spinning off the retail operations would expose Agrium shareholders to "substantial risk with no sustainable benefit," and the company will not pursue such action, Wilson said.

A spinoff is in the company's best long-term interests, the source close to Jana said.

"Hedge funds will be portrayed as focused on short-term value, but this is kind of the inverse -- (Jana is) pointing to value creation over a multiyear period, (Agrium is) looking at the last eight months.

"It's hands-down the case that they haven't generated it over the long term."

The hedge fund is also looking for Agrium to add retail experience to its board, and has not ruled out pushing for wide changes to the board of directors and senior management.

Discussions between Agrium management and Jana continue, and the source noted that McGraw-Hill Companies -- in which Jana bought a significant stake -- also initially balked at spinning off a division as the hedge fund requested.

Jana began talks with Agrium management in May and claims to have at least one victory. Agrium announced earlier this month a $900 million share buyback.

Analyst Chris Damas of BCMI Research, an independent Canadian equity research firm, said Agrium should look carefully at splitting the retail and wholesale arms and questioned management's reasoning for rejecting the idea.

"Risky to shareholders? How so? Or (is a spinoff) risky to the board and senior management that the two pieces would be more easily bought up by competitors and they would be out of a job?"

But Raymond Goldie, who follows Agrium for Salman Partners, said spinning off the retail side would not add to earnings.

"We agree with Agrium," he wrote to clients. "Agrium's retail people know what farmers are doing and what they want."

Goldie said Agrium's retail staff told its wholesale employees that farmers were likely to want more of one type of nitrogen fertilizer over another, because of this year's drought conditions. That allowed Agrium to adjust nitrogen production to fit changing demand, Goldie said.

The stock has soared this year, helped by the U.S. Midwest drought which has scorched crops and driven up corn prices. But Agrium shares are only returning to near the level they reached about 18 months ago, despite bullish farm markets, Damas said.

Fertilizer prices often track the prices farmers can collect for their crops, and corn requires a lot of fertilizer.

Based in Calgary, Alberta, Agrium is one of the world's top producers of nitrogen-based fertilizers such as urea and ammonia and is the biggest retail seller of farm products such as fertilizer, crop chemicals and seed in the United States.

In 2011, Agrium's retail operations accounted for $769 million in EBITDA, or 30% of the company's total earnings before interest, taxes, depreciation and amortization.

Rather than spinning off the retail business, Agrium has been building it up and is aiming to boost retail EBITDA to $1.1 billion by 2015.

The company has a C$575 million ($579 million) deal with Glencore International to buy 232 Canadian farm retail outlets and 17 Australian stores owned by Viterra, which would make Agrium the biggest farm retailer in Canada. The deal still needs regulatory approval.

Glencore is attempting to complete its takeover of Viterra this summer.

In just over a year, Jana has picked up significant stakes in Marathon Petroleum and McGraw-Hill, while agitating for change at Dutch delivery company TNT Express .

Earlier this month, Agrium reported a 20% jump in second-quarter profit to $860 million, or $5.44 per share.

It earned record-high EBITDA in both its retail and wholesale divisions.