November 2016

Potash producers join forces

By Cecilia Keating

Potash Corp Rocanville
Post-merger, PotashCorp will be able to absorb Agrium’s mines and sell its own potash, nitrogen and phosphate assets directly through Agrium’s retail network | Courtesy of PotashCorp

PotashCorp and Agrium announced on Sept. 12 that they agreed to a “merger of equals,” forming a Canadian agricultural giant that will combine PotashCorp’s vast potash mines with Agrium’s lucrative farming retail business.

The so-far unnamed company will be the largest crop nutrient factory in the world, with an enterprise value of $36 billion. It will have close to 20,000 employees in more than 18 countries.

PotashCorp shareholders will enjoy a 52 per cent stake in the new company, with Agrium shareholders holding the rest. The new company will have Agrium’s current CEO and PotashCorp’s current CFO. The board of directors will equally split, and PotashCorp’s CEO will be executive chairman.

Scotiabank analyst Ben Isaacson said he believes Agrium will have the upper hand. “Once the dust has settled and the integration is complete, which may take some years, it really will be an Agrium-run company,” he said.

While both companies have potash, nitrogen and phosphate mines, 67 per cent of Agrium’s earnings before interest, taxes, depreciation and amortization in 2016 have been generated by its retail business.

Post-merger, PotashCorp will be able to absorb Agrium’s mines and sell its own potash, nitrogen and phosphate assets directly through Agrium’s retail network, which includes 1,400 facilities worldwide.

Meanwhile the benefit for Agrium is less clear and has puzzled analysts. Potash prices have fallen 34 per cent in the past year. In October PotashCorp shares were trading around $21, a precipitous drop from $46 in early 2015.

Isaacson believes Agrium is thinking long-term and capitalizing on the miner’s current market valuation. “Agrium is using this bottom of the cycle valuation to merge. Once the cycle comes back they’ll look much stronger,” he said. Isaacson said he expects potash prices will rise when the market is less saturated.

According to PotashCorp spokesman Randy Burton, the new company is expected to generate up to $500 million of annual savings from “synergies,” primarily from “distribution and retail integration, production and optimization [of operating expenses], and procurement.” The majority of the savings “are unrelated to headcount,” Burton said, but the company does foresee some staff reductions through attrition and reduced hiring.

Votes will take place on Nov. 3 in Saskatoon for PotashCorp and on the same day in Calgary for Agrium. According to Isaacson, the deal will be a “tougher sell” for Agrium shareholders, who are being asked to shift their investment from a reliable retail enterprise to a more volatile commodity.

The deal is expected to close in mid-2017, subject to review from Canadian and international regulators.


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