Why Potash has more to gain from ‘merger of equals’

1 Sep 2016

Calgary Herald


Financial Post

Why Potash has more to gain from ‘merger of equals’

High-value retail distribution seen as win for firm in a deal with Agrium

It’s being billed as a “merger of equals,” but the potential tie-up between Potash Corp. of Saskatchewan Inc. and Agrium Inc. may not pan out as many investors expect.

A combination undoubtedly would create a strategically more competitive company, and face less regulatory scrutiny than past deals given that both parties are headquartered in Canada.

While details are scarce at this point, analysts expect any transaction will be more positive for Potash Corp. shareholders than it is for those of Agrium.

“At first blush, we’re a little perplexed by the proposed marriage,” said Steve Hansen, an analyst at Raymond James.

He acknowledged that the additional scale a tie-up would come with should bring attractive synergy opportunities in the form of cost reductions, but questioned the longer-term strategic benefits — particularly for Agrium.

Hansen believes such a deal would represent a sizable departure in strategy, when compared to the company’s current retail-centric growth plans.

“Put another way, we’re inclined to think that Potash Corp. has far more to gain from this deal,” the analyst said in a research note, noting that it would gain high-value retail distribution, while Agrium would be doubling down on its wholesale nitrogen, phosphorus and potassium exposure.

He also pointed to the lack of clarity on the future of Canpotex, whose members include Potash Corp., The Mosaic Co. and Agrium.

Finally, Hansen said a merger seemingly saddles Agrium “with the acute long-term challenges still facing global potash markets.”

Peter Prattas at AltaCorp Capital agrees that a deal would likely be better for Potash Corp. than it is for Agrium.

Based on Monday’s closing prices, he assumes $225 million in synergies, and believes the transaction would be value neutral for Agrium shareholders.

“We believe Potash Corp. shareholders would benefit from owning a more diversified entity, with greater growth prospects and less exposure to a fundamentally challenged (oversupplied) potash market,” Prattas told clients.

The analyst also noted whereas the proposed takeover of Potash Corp by BHP Billiton PLC was subject to an Investment Canada Review by the federal government, a deal with Agrium would not be.

However, he does expect local governments will attempt to add restrictions on job cuts and production curtailments.

Given the limited business overlap between Potash Corp. and Agrium, RBC Capital Markets analyst Andrew Wong estimates the combined entity could generate about US$150 million in synergies and cost savings. “Initial synergies and savings may be hard to come by,” he said in a report.

Wong believes a combination could provide Potash Corp. with an outlet through vertical integration with Agrium’s retail business, while a bigger stake in Canpotex (combined 67 per cent) could push the company toward a more aggressive market strategy.

As for Agrium, the analyst expects a merger of equals would imply a premium for shareholders, since the stock trades at a discount to Potash Corp.

Even with no information, Scotiabank analyst Ben Isaacson thinks the trade to make is very straightforward: short Potash Corp. and long Agrium.

“Despite the term ‘merger of equals,’ we think Potash Corp. may have to pay up for Agrium,” he told clients. “While all indications point to Potash Corp. pursuing Agrium, which would require a huge premium paid to cornerstone Agrium shareholders, based on our conversations with them yesterday, don’t count out Agrium initiating this deal.”

If the deal does turn out to be one driven by Agrium, Isaacson doesn’t think it will have to pay any premium. In that scenario, the analyst would still short Potash Corp.

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About prosperitysaskatchewan

Consultant on Saskatchewan's natural resources.

Posted on September 1, 2016, in economic impact, miscellaneous, political, potash. Bookmark the permalink. Leave a comment.

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