PotashCorp, Agrium in merger talks amid weak fertilizer markets

VANCOUVER — Fertilizer giants Potash Corporation of Saskatchewan (TSX: POT; NYSE: POT) and Agrium (TSX: AGU; NYSE: AGU) are reportedly contemplating a potentially game-changing merger. On Aug. 30, the companies confirmed “preliminary discussions” in a move that surprised some analysts and prompted a response from Saskatchewan Premier Brad Wall.

The news comes during a tough time in the fertilizer business. Nitrogen contracts have been delayed in China and India, while strong offshore imports and increased domestic supply in the U.S. have put additional pressure on prices. Global phosphate markets have also struggled due to declining input costs, increased competitive supply and weaker Indian demand.

In mid-January PotashCorp shuttered its New Brunswick mine due to down markets. Credit: Potash Corporation of Saskatchewan.

PotashCorp is the world’s largest fertilizer company and expects to sell between 8.3 million and 8.8 million tonnes of potash this year. During the second quarter the company reported an average realized potash price of $154 per tonne, which marks a from 44% drop from the US$273 per tonne level it reported during the same period in 2015.

“We do see a more constructive environment moving forward. In recent weeks, we have seen new potash contract settlements in India and China providing a reminder of the importance of our products and the reality that purchases will inevitably resume,” commented PotashCorp president and CEO Jochen Tilk during the quarterly conference call on July 28.

“When we look at the supply side, we see only modestly higher global operation capability next year, which comes primarily from other existing producers in North America,” he added.

PotashCorp is finishing up a $3-billion expansion project at its Rocanville facility roughly 200 km east of Regina, Saskatchewan. Credit: Potash Corporation of Saskatchewan.

Meanwhile, Agrium has moved toward the retail side of the business. The company acquired 33 retail locations with expected annual sales in excess of $230-million on a year-to-date basis. Agrium is also working on additional retail acquisitions — including a deal with Minnesota-based Cargill — that could add over 30 locations and represent over $300-million in expected annual sales.

Raymond James analyst Steve Hansen said that “at first blush” he was “a little perplexed by the proposed marriage.” He did cite potential “ripe synergies,” however, that could offer the companies as much as $500 million in cost savings.

“[PotashCorp’s] desire to pursue large-scale [mergers-and-acquisitions] and seek out downstream retail/distribution assets has been well known for a time. In this context, the aforementioned marriage could be construed as logical, in our view,” Hansen added, noting the company’s attempt to take-out Germany’s K+S, and its acquisition of a 9.5% stake in Brazil-based Fertilizantes Heringer S.A. last year.

“Less clear, however, are [Agrium’s] key motivations given that the deal seems largely incongruent with its retail-centric growth strategy, and without clarity on Canpotex’s future, it seemingly saddles the company with the acute long-term challenges still facing global potash markets,” he continued.

Scotiabank senior fertilizers analyst Ben Isaacson believes the deal was “leaked to gauge market opinion,” and said that based on his sources it’s possible that Agrium initiated the negotiations. He noted it could eventually be viewed as a “brilliant bottom-of-the-cycle move by [Agrium] to secure out-of-favour assets trading at [roughly 30%] of replacement cost.”

Employees underground at PotashCorp’s Allan operation east of Saskatoon, Saskatchewan. Credit: Potash Corporation of Saskatchewan.

The other major question raised relates to potential competition, or regulatory, hurdles for the deal. Back in late 2010 Tony Clement — when serving as the Canadian Minister of Industry — rejected BHP Billiton‘s (NYSE: BHP; LON: BLT) attempted takeover of PotashCorp under the Investment Canada Act after deciding it was likely not in the “net benefit of Canada.”

Given that both PotashCorp and Agrium are Canadian companies, however, it seems less likely that investment regulations could come into play.

During a media session following the news, Premier Wall said that both companies indicated the “interests of Saskatchewan are at the forefront during the preliminary discussions.” He added that the provincial government would “monitor the situation” in terms of impact on “jobs, the taxes paid, and the economic impact of these companies.”

PotashCorp has traded within a 52-week window of $19.93 and $34.28, and gained over 11% on the news en route to a $23.31 close at the time of writing. The company has 839 million shares outstanding for a $19.9 billion market press-time market capitalization.

Agrium has moved within a twelve-month range of $104.70 and $139.10 per share, and gained around 8.4% on the news before closing at $126.24 at press time. The company maintains 138.2 million shares outstanding for a $17.6 billion market capitalization.