Potash merger a long-term game for potash firms

  • 13 Sep 2016
  • The StarPhoenix
  • ALEX MACPHERSON

Merger a long-term game for potash firms

Short-term pain possible before market turns around: expert

When you’re talking about consolidations and synergies, the concern is reduction in workforce… TRENT WOTHERSPOON

A multibillion-dollar merger between Potash Corp. of Saskatchewan Inc. and Agrium Inc. could have significant benefits over the long run, but won’t insulate the new firm from an extremely weak fertilizer market, according to an industry expert.

“We might see one or more mines put into maintenance mode for the medium term while this is going on, and until the market turns around,” said Brooke Dobni, a professor at the University of Saskatchewan’s Edwards School of Business.

“(But) they’re looking at their competitive fitness over the long term, in terms of being able to compete in the global market, and this is probably the only play that they have — and this is the time to do it.”

Saskatoon-based PotashCorp and Agrium — which is headquartered in Calgary — announced the merger Monday morning, about two weeks after confirming that talks were underway.

The deal is subject to approval by the federal Competition Bureau, but both companies said they expect it to close in mid-2017. The yetto-be-named combined company will have a market capitalization of about US$26 billion and almost 20,000 employees.

In a joint interview with PotashCorp president and CEO Jochen Tilk, Agrium president and CEO Charles (Chuck) Magro said the merger is, in part, a response to “fierce” market conditions.

“You can either sit and wait (and see) whether or not the storm passes around you, or you look how you can be more competitive in that environment,” Tilk added.

“One basically suggests you surrender control. The other is you take control and, in part, this transaction is about that. It’s about taking control in a more competitive world.”

Under the agreement, PotashCorp shareholders will end up with a 52 per cent stake in the combined company, while Agrium’s shareholders will own 48 per cent of it. Magro will act as CEO while Tilk will serve as executive chairman.

The new company’s head office will be located in Saskatoon. Its potash operations will be run out of the city, with other aspects of its business handled by a second office in Calgary, Tilk and Magro said. The companies said the merger is expected to result in annual savings of up to US$500 million, of which about US$125 million will come from “production optimization.”

Analysts have predicted that a merger could lead to production cuts in Saskatchewan as sustained weakness in the potash market forces the company to find savings.

Dobni said an estimated US$500 million in annual savings suggests dramatic cost-cutting measures. The only way to do that, he said, is to shutter production facilities and wait for the market to turn.

“Those are difficult decisions to make for organizations, but they have to make them. But let’s assume that nothing happened … I think at the end of that it would be a lot worse for one or both of the companies.”

Tilk and Magro deflected questions about the likelihood of production cuts at the new company’s six Saskatchewan potash mines.

Both said the bulk of its projected savings will come from optimization and integration of assets and supply chains.

Premier Brad Wall told reporters in Regina that he is generally pleased with the merger, which he said will create an “international champion” that can withstand the headwinds buffeting the fertilizer industry.

Wall added that while Tilk and Magro convinced him that the combined company’s forecast savings won’t come at the expense of Saskatchewan jobs, the province will monitor the deal to ensure the companies live up to their commitments.

Not everyone is thrilled by the merger.

The Agricultural Producers Association of Saskatchewan and the National Farmers Union have previously expressed concern about consolidation leading to fewer choices and higher prices.

New Democratic Party interim leader Trent Wotherspoon echoed those concerns and added that he’s worried about the prospect of job losses.

“When you’re talking about consolidations and synergies, the concern is reduction in workforce, of workers, of scaling back production — real concerns for Saskatchewan from a perspective of jobs,” Wotherspoon told reporters on Monday.

Tilk and Magro are optimistic about the change.

Agrium’s CEO said the merger will create a “Canadian champion” that should benefit shareholders in the long term as well as create benefits for the country.

“It’s going to be the world’s largest crop inputs provider: fully integrated, diversified — that’s pretty exciting for Canada,” Magro said.

 

About prosperitysaskatchewan

Consultant on Saskatchewan's natural resources.

Posted on September 13, 2016, in economic impact, miscellaneous, political, potash. Bookmark the permalink. Leave a comment.

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