POTASH, AGRIUM TALK ‘MERGER OF EQUALS
- 31 Aug 2016
- National Post – (Latest Edition)
- Claire Brownell
POTASH, AGRIUM TALK ‘MERGER OF EQUALS’
$19.6B Potash Corp. market cap $17.3B Agrium market cap $154 Average realized Q2 price of potash in U.S. dollars, down from $900 in 2008 62% North American potash capacity combined entity would control: National Bank
Potash Corp. of Saskatchewan Inc. and Agrium Inc. confirmed they are in talks about a possible “merger of equals” Tuesday, a tie- up that could give the Canadian agricultural giants added clout if potash prices eventually recover, industry watchers say.
The pairing would combine Saskatoonbased Potash, which has access to about onefifth of the world’s supply of its namesake fertilizer ingredient, with Calgary- based Agrium, a major agricultural producer and distributor with $ 15 billion in sales in 2015.
Their discussions come amid a precipitous decline in the price of potash, with Potash Corp. reporting an average realized price per tonne of US$ 154 in the second quarter, down from US$900 in 2008.
But Dan Sherman, an analyst with Edward Jones who covers the sector, said there is reason to be optimistic about potash long-term as the world’s population grows and needs more food, which in turn requires more of the fertilizer ingredient.
Meanwhile, Agrium’s retail business would provide diversification to cushion Potash from the next commodities downturn, perhaps preventing the conditions that have wiped out two-thirds of the latter’s market capitalization since the 2008 financial crisis.
A merger “would make it an even more formidable force in the potash market,” Sherman said. “If both companies are allowed to pursue the strategy they currently have … the combined entity would be very attractive.”
The two companies acknowledged Tuesday they have entered preliminary talks, but have not reached an agreement. Even if they do, there’s no guarantee the merger will actually go ahead.
Potash and Agrium have fared very differently since the financial crisis, with Agrium’s share price recovering and beating its 2008 peak of $ 110.70. Agrium’s stock had increased 7.4 per cent to $ 125.09 when markets closed Tuesday, with Potash shares surging 11.5 per cent to $23.30.
Regardless, Sherman said the two companies do bring equal but different strengths to the table. It’s unlikely one party will have leverage over the other as negotiations progress, he said.
“If you believe potash prices are stabilizing, they’re sitting at the bargaining table in about equal positions,” Sherman said.
Jeffrey Stafford, an analyst with Morningstar, said Tuesday’s share price increases suggestions investors may be getting a little too excited about the deal, however. The stock prices of other fertilizer companies got a boost as well, with potash competitor Mosaic up nine per cent by the end of the trading day.
“Opportunities for cost synergies make sense to us, but we have a harder time justifying the market optimism,” Stafford said in a note. “We think the opportunity for ( potash) price hikes are limited.”
The pri c e of potash dropped sharply in 2013, when a Russian and Belarusian export group collapsed and prompted a sell- off. Farmers who are cashstrapped from weak crop prices have also been buying less fertilizer, reducing demand for potash.
If t he two companies come to an agreement, they will have some regulatory and political hurdles to clear. Potash was once a Crown corporation and Saskatchewans will be sensitive to any possible job losses, with Ottawa rejecting a 2010 proposed US$ 38.6- billion takeover of Potash by Australian mining giant BHP Billiton Ltd. amid objections from the province.
In a media scrum Tuesday, Saskatchewan Premier Brad Wall said the fact both companies are Canadian alleviates many of the regulatory concerns that plagued BHP.
If the companies come to an agreement and the merger goes through, he said he would lobby for the combined company to hire more people at its Saskatchewan corporate office.
“Both of them indicated to me — and it was good to hear this — that the interests of Saskatchewan have been at the forefront of even these preliminary discussions,” he said. “We would want to see Saskatchewan’s i nterests protected and furthered if there is to be a merger.”
Last year, Potash was the one trying to acquire a foreign rival, bidding US$ 8.7 billion for German mining company K+ S AG. Potash withdrew the bid in October, citing the weak commodities market.
Sylvain Charlebois, dean of management at Dalhousie University and a professor of food distribution and policy, said there will likely be eventual job losses if the merger goes through, but not right away.
He said he wouldn’t be surprised to see even more consolidation in the industry in the future, with companies looking for efficiencies in a tough market that will put them in a better position once it recovers.
“Things are getting interesting in fertilizers,” he said.