Potash, Agrium talk deal as commodity rout drags on

Potash, Agrium talk deal as commodity rout drags on


CALGARY — The Globe and Mail

Published Tuesday, Aug. 30, 2016 5:04PM EDT

Last updated Tuesday, Aug. 30, 2016 6:44PM EDT



Potash Corp. of Saskatchewan Inc. and Agrium Inc. disclosed early-stage talks on Tuesday about launching a merger of equals. Don’t take the courtship as a sign that all’s well in the fertilizer industry.

In fact, it may be more a case of crying uncle in the grip of the commodity stagnation that has already inflicted wounds in the metals and oil sectors, and festered deep into the Canadian economy.

A global oversupply of crop nutrients, as with oil and natural gas, has built up thanks to a slowdown in China and other major export markets, and it’s hit prices hard.

Putting two Canadian potash, nitrogen and phosphate titans together would offer savings to deal with the weakness. There have been past efforts to buy out or break up these two players, but lean times have injected a new sense of urgency.

It’s another indication of how vulnerable Western Canada remains to highly cyclical industries in which it has little influence over prices.

Potash, a one-time Saskatchewan Crown corporation, is already the world’s top fertilizer producer by capacity. The addition of Agrium will pad the stats in a big way, even adding another potash mine, though it is much better known for its nitrogen-production facilities.

Each has operations around the world, and a one-third stake in the Canpotex potash export consortium. Agrium has a lucrative retail business with 1,400 outlets, many of them in the U.S., Australia and Latin America. Its share performance has outperformed Potash’s over the past eight years, partly on the strength of that business.

If merged today, the market capitalization would ring in at a hefty $36.5-billion, though if it happened a few years ago when commodities were rocking it would have been more. Indeed, Potash itself would have fetched $39-billion (U.S.) in 2010 had Australia’s BHP Billiton been able to close its takeover offer for the Canadian company.

Instead, Ottawa blocked the deal, siding with Saskatchewan Premier Brad Wall and his contention that the potash mines represented strategic assets, and therefore should not be entrusted to foreigners. The shares are worth less than half of what they were in the weeks before the transaction was quashed.

Last year, Potash tried to acquire Germany’s K+S AG, a deal that was stymied by a rough reception by the target’s board and worsening fertilizer market conditions.

Agrium has not escaped drama either. In 2012, New York hedge fund Jana Partners launched an ultimately unsuccessful proxy battle to install its own nominees to the board and force a spinoff of the retail farm products business. Since the end of that melee, Agrium’s stock has fared better than its sector rivals.

Whether Ottawa balks at the newly disclosed marriage plans remains to be seen, though from an asset standpoint there is little overlap to worry competition regulators. There are no major foreign ownership interests to make provinces nervous about less-than-compassionate control.

The Saskatchewan government will pore over every comma in the agreement documents, as its own royalty revenues dwindle with potash prices. The CEOs have already made courtesy calls to Mr. Wall to assure him the province’s interests are being taken into account.

A glimpse into recent corporate financials shows the current strain in the industry. In its second-quarter results, Agrium reported a 16-per-cent drop in earnings, blaming weak fertilizer prices. It also warned profit for the full year will lag its previous target, with the retail arm cushioning the blow somewhat.

Potash chopped its dividend twice this year, and in July lowered earnings expectations for the rest of 2016. Its quarterly net income tumbled 71 per cent.

Fertilizer is suffering for similar reasons as other major commodities now pressured by gluts – the weakening outlook for Chinese demand, once seen as rock solid on increasing domestic wealth and a fast-expanding economy.

The long-term forecast is now opaque at best, so it makes sense to consider a big deal that will lower costs and take advantage of economies of scale. As a result, however, Western Canada may suffer more job losses at a time when it can ill afford them.



About prosperitysaskatchewan

Consultant on Saskatchewan's natural resources.

Posted on August 31, 2016, in economic impact, political, potash. Bookmark the permalink. Leave a comment.

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