Potash ‘merger of equals’ may hurt Saskatchewan

 

  • 10 Sep 2016
  • The StarPhoenix
  • BRUCE JOHNSTONE

Potash ‘merger of equals’ may hurt Saskatchewan

We would want to see Saskatchewan’s interests protected and furthered.

Premier Brad Wall seems rather sanguine about the proposed merger of Potash Corp. of Saskatchewan and Agrium Inc., noting the deal would be reviewed for its potential impact on jobs in Saskatchewan, but overall didn’t seem too concerned about it. Maybe he should be. While the friendly AgriumPotashCorp deal is no where near as threatening to the province’s interests as the attempted hostile takeover of PotashCorp by BHP Billiton in 2010, some analysts feel there would be consequences for the province should the deal go ahead — and some of them could be negative.

Responding to the proposed US$30-billion merger last month, Wall said “we would want to see Saskatchewan’s interests protected and furthered,’’ adding “our government would even want to begin proactively working on some ideas that would make Saskatchewan an attractive place for even more jobs.’’

Certainly, Wall is right to be concerned about losing jobs as a result of this deal. Mergers and acquisitions are generally about generating synergies, as job cuts are euphemistically referred to in the corporate world.

As for creating “even more jobs,” Wall seems to be suggesting that PotashCorp will emerge as the dominant partner in this merger and will be taking over Agrium, its potash assets and Calgary-based head office employees as well.

That could prove to be wishful thinking on the premier’s part.

So what’s behind this so-called ‘merger of equals’?

For starters, potash prices have been in the tank since the collapse of the Belarusian Potash Co. (BPC) cartel in 2013 and the financial crisis and Great Recession of 2008-2009. Potash prices have been on a gut-wrenching, mainly downhill, slide ever since, peaking at US$872.50 per tonne in late 2008-early 2009, plummeting below US$350 per tonne in 2010, rebounding to US$500 in late 2011-early 2012, only to fall back down to US$214 per tonne in recent months.

Potash company stocks have been on a similar roller-coaster ride. As one bank economist noted, the combined market capitalization of both companies was about $37 billion (Cdn) at the start of the week. PotashCorp alone was worth twice that at the height of the commodities boom.

And that combined market cap was less than what BHP Billiton was offering for PotashCorp during its ill-fated hostile takeover bid six years ago.

The point is that PotashCorp, which is an almost pure potash play, has not fared as well as other, more diversified companies, particularly in comparison to Agrium.

Agrium (formerly Cominco Fertilizers, which became an independent public company with an initial public offering in 1993), has pursued a strategy of product and market diversification, buying more than 200 former Viterra retail agricultural supply centres from Glencore International in 2013 and expanding its Vanscoy potash mine near Saskatoon in 2014, among other things.

Indeed, one source familiar with both companies believes Agrium is the better managed company, with a 20 per cent return (compounded annually) since 1993, stable share price and sustainable dividend level. PotashCorp, by contrast, “bet the farm’’ on one commodity, potash, and has seen it share price rise and fall accordingly

PotashCorp, the source says, is essentially a ‘one-horse stable’; and the horse is becoming old and uncompetitive. By comparison, Agrium has a very competent, but young and aggressive, senior management team, which is focused on its core strategy. “Agrium is clearly in the driver’s seat on any merger,’’ the source says.

So what would be the likely result of any merger? More jobs? More potash production? Not likely.

One market analyst says the merger of two of Canada’s largest fertilizer companies would almost certainly lead to production cuts at Saskatchewan potash mines. Faced with oversupply and low prices, most companies would reduce production of the commodity, shuttering its least productive assets and running its most efficient mines harder, the analyst said.

Indeed, that’s exactly what PotashCorp has been doing, shutting down its less profitable New Brunswick operations and temporarily cutting production and laying off hundreds of workers at its Saskatchewan mines. Analysts predict more of the same, possibly up to and including the closure of the Vanscoy mine, if the merger goes ahead.

So while the Agrium-Potash merger doesn’t pose an existential threat to Saskatchewan’s potash industry like the BHP deal did, it should be scary enough to keep Mr. Wall awake at night.

 

 

About prosperitysaskatchewan

Consultant on Saskatchewan's natural resources.

Posted on September 11, 2016, in economic impact, miscellaneous, political, potash. Bookmark the permalink. 1 Comment.

  1. Nice article; good to see some clear thought and understanding exists out there. Nice to see you unmuddy the waters regarding the potential impact of this potential merger. All said, just one point to keep in mind: although jobs may be lost due to synergies being realized, the potential income gain to the province from increased consolidation – especially for potash sales to the U.S. (where Canadian consumers (farmers) wouldn’t be negatively impacted) is a gain that ought to be considered in this Saskatchewan centric debate when conducting the benefit-cost analysis.

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