- Export venture means foreign customers would see little change
- Potash assets could be sold off to competitors, Stifel says
A combination of the biggest players in any industry is usually frowned upon, yet the potential merger of Canada’s two largest fertilizer producers may prove to be an exception.
Potash Corp. of Saskatchewan Inc. and Agrium Inc. said Tuesday they’re in talks about a merger of equals. For buyers of their potash outside of North America, things would look little different after the transaction. Both companies, along with U.S. producer Mosaic Co., already operate a joint venture that handles their exports. That means any deal shouldn’t pose harm to competition, according to Bloomberg Intelligence analyst Jason Miner.
"Everyone is negotiating with the three in a unit anyway," he said in an interview, referring to overseas buyers.
A merger of Agrium and Potash Corp. -- both of which have a current combined market capitalization of about $28 billion -- would be the biggest Canadian merger since CNOOC Ltd. bought Nexen Energy ULC in 2013. It would create a company with more than 46 percent of North American potash production volume, according to Bloomberg Intelligence, as well as strong positions in both phosphate and nitrogen fertilizers. As such, the merger would need to be reviewed by the Canadian and U.S. governments, while the European Union would look at the impact on exports to the bloc, said Mark Warner, principal at MAAW Law specializing in Canadian and American antitrust law.
Click here for Bloomberg Intelligence analysis of an Agrium-Potash deal
If competition concerns about potash do emerge, they could be addressed by selling one or more potash assets to competitors such as BHP or Germany’s K+S AG, Stifel Nicolaus & Co. analyst Paul Forward said in a note. The world is awash with potash, however. Bloomberg Intelligence estimates global capacity to be 82 million metric tons, compares with global demand of about 60 million tons.
In phosphate, Agrium doesn’t have significant production, while there’s only a small overlap between Agrium and Potash Corp.’s wholesale fertilizer businesses, RBC Capital Markets analyst Andrew Wong said in a note. While Potash Corp. is essentially a mining company, extracting potash from below ground and processing the commodity, Agrium got 77 percent of its revenue last year from its farm-retail business.
Canadian authorities may look upon the merger favorably, Warner said, in contrast to Australia’s BHP Billiton Ltd.’s bid to acquire Potash Corp., which was blocked in 2010 after a review under the Investment Canada Act -- something that won’t be required with an Agrium-Potash Corp. deal. The province of Saskatchewan, whose Premier Brad Wall was particularly vocal in his opposition to BHP, would have less concern about an Agrium-Potash tie-up because both companies are Canadian and already partner in Canpotex, Warner said by phone.
"From Potash Corp. and the Saskatchewan’s government’s point of view, they would rather have Potash Corp. and Agrium merge as a defensive measure so that someone like BHP Billiton doesn’t look at the low dollar and think, ’Let’s take another run at it," Warner said.
Wall told reporters Tuesday he spoke to the chief executive officers of both companies and was assured that the interests of the people of Saskatchewan would be at the forefront of their discussions. He said the proposed merger would be received differently than BHP’s bid because both Agrium and Potash Corp. employ thousands of people in the province, and that he was hopeful the merged entity would increase its corporate presence in Saskatchewan.
"It’s a merger of two Canadian companies, and so my understanding is that the Investment Canada review process that was triggered by that proposed takeover would not be triggered in this regard," he said.
Because of the lack of any real overlap of assets, there’s a much greater likelihood of Potash Corp. getting a deal approved with Agrium than any other fertilizer company, said John Goldsmith, deputy head of equities at Montrusco Bolton Investments in Toronto, which manages about C$6 billion ($4.6 billion) of investments including Agrium shares. The only potential stumbling blocks might be production curtailments or job cuts at Potash Corp. operations in Saskatchewan, he said.
“Regardless of whether it’s a merger of equals, or one is acquiring the other, if any rhetoric leads Brad Wall to think there will be job cuts, he’ll be opposed to that,” Goldsmith said in an interview.