Potash Merger – Makes Sense for Both Firms
- 14 Sep 2016
- The StarPhoenix
- ALEX MACPHERSON
Makes sense for both firms: analyst
I wouldn’t be doing this deal if I didn’t think that this was the right time, or the right deal.
A multibillion-dollar merger between Potash Corp. of Saskatchewan Inc. and Agrium Inc. makes sense for both companies, albeit for very different reasons, according to a Toronto-based industry analyst.
“For PotashCorp, this is a logical and immediate solution to some challenges that both a deteriorating potash and nitrogen market have caused,” said Ben Isaacson, who studies the fertilizer business for Scotia Capital Inc.
“(Agrium) are looking at potash assets that are trading well below replacement cost, and hoping that when the cycle turns and it improves — however long that will be: four, five, six years from now — they could look like heroes if those assets are re-rated.”
Announced Monday after weeks of speculation, the merger would create the world’s largest crop nutrient supplier. The yet-to-benamed firm would have almost 20,000 employees, operations in 18 countries and a market capitalization of about US$26 billion.
If it is approved, the all-stock deal would give PotashCorp shareholders a 52 per cent stake in the new company, which will be headquartered in Saskatoon. Shareholders of Calgary-based Agrium would own 48 per cent of it.
The agreement — which the companies expect to close in mid-2017 — would result in Agrium president and CEO Charles (Chuck) Magro serving as the new firm’s CEO and PotashCorp president and CEO Jochen Tilk acting as its executive chairman.
“I wouldn’t be doing this deal if I didn’t think that this was the right time, or the right deal,” Magro told financial analysts on a conference call Monday morning.
“And I get there pretty easily: I look at the strategic fit and I look at combining the world’s largest fertilizer producer with the world’s largest ag retailer. That makes an awful lot of sense to me.”
Isaacson said the merger’s success hinges on Agrium’s ability to find the US$500 million in savings it estimated a deal would create — nearly double the US$250 million to US$350 million projected by most analysts.
With potash prices expected to remain low for several years, those savings are critical to placating Agrium shareholders whose stable, profitable retail strategy will be diluted by a more volatile wholesale business until the market turns, he said.
“The onus is really now on the integration team to really prove that the short-term risk (of the merger) is manageable, that the synergies offset the time it will take for the potash market to turn around.”
In a note to investors, Raymond James Ltd. analyst Steve Hansen described Agrium’s play as “bold” and “opportunistic,” but added that it entails a fair degree of uncertainty given current market conditions. ‘
The fertilizer market has fallen since 2008, when the potassium salts were trading at around US$900 per tonne. With excess supply depressing prices to about US$200 per tonne, companies have been forced to respond by cutting costs.
While the merger appears to align with the view that the bottom of the cycle is approaching, Hansen said in the note that it means asking Agrium’s shareholders to accept more risk — and that it’s not clear if they will.
“Based upon our conversations thus far, we’re not convinced that the majority of shareholders like this trade, but only time will tell,” he said in the note.
Fai Lee, who studies the fertilizer business for Odlum Brown Ltd., thinks the merger could have upsides for both companies by reducing risk for PotashCorp and boosting potential gains for Agrium as the market recovers.
“At the end of the day, I think the sector, compared to where we are now, I think things are going to improve,” Lee said.
“I see better days for the sector and that’s going to ultimately translate to a higher valuation, one would expect.”