PotashCorp, Agrium are better off together – analysts

12 September 2016 21:58 Source:ICIS News

Mining operation in Rocanville, Saskatchewan. (Image used under license from Potash Corporation of Saskatchewan Inc.)
A merger of equals "makes a lot of sense" and both Canadian companies should benefit in both the short- and long-term, researchers say. Above, an employee works at the mining operation in Rocanville, Saskatchewan. (Image used under license from Potash Corporation of Saskatchewan Inc.)

HOUSTON (ICIS)--The proposed merger of equals between the Canadian agriculture firms PotashCorp and Agrium should allow the companies to achieve synergies while also benefitting from each other's strengths, analysts said on Monday.

The boards of both companies unanimously approved the deal, which will create a company with an enterprise value of $136bn. The deal should close in mid-2017.

"We re-emphasise that this is a merger that makes a lot of sense and in an industry that is well overdue for consolidation," according to a research note by Bernstein, a research and brokerage firm.

Both companies should benefit in the short-term from the merger, said Monica Bonar, a senior director at Fitch Ratings. However, the deal is bigger than the commodity price cycle.

While the two companies will cut costs through eliminating overlap among their operations, they will also achieve longer-term benefits from the complementary nature of their businesses.

Agrium has grown by acquiring large farm retail-chains, while PotashCorp is primarily focused on fertilizer production.

In fact, Agrium's retail division made up 77% of the company's sales in 2015 and 45% of its earnings before interest, tax, depreciation and amortisation (EBITDA).

These retail operations should help PotashCorp better understand the buying habits of its customers, Bernstein said.

Plus, the merger will give PotashCorp more flexibility to close down its higher-cost mines, Bernstein said. Both companies will have new mines in Vanscoy and Rocanville, Saskatchewan.

These new mines will increase the likelihood that PotashCorp would close Cory and Lanigan, its higher-cost mines, Bernstein said.

While the companies emphasised that they would not close any mines, Bernstein interpreted this as meaning that any decision to close a mine will be determined by the potash market and not by the merger.

Looking ahead, Bernstein expects anti-trust regulators in the US and Canada to allow the merger to proceed. The companies will likely argue that potash and nitrogen are global markets.

Mosaic made such an argument before regulators when defending its $1.4bn acquisition of the phosphate business of CF Industries, Bernstein said. This deal ultimately went through.

The merger between Agrium and PotashCorp is the latest among agriculture companies, which are struggling in a multi-year downturn, Fitch said. The market has had four years of bumper crops and high stocks, and this has caused prices to decline.

Because farmers are earning less, they are also spending less on such products as agrochemicals and fertilizer.

Companies reacted to these dimming prospects by pursuing deals. Monsanto kicked off this trend a year ago in its unsuccessful bid for Switzerland-based agrochemical producer Syngenta. Dow Chemical and DuPont then announced their merger of equals, which will later result in the spin-offs of three companies that will produce agrochemicals and seeds; specialty chemicals and commodity chemicals.

China National Chemical (ChemChina) later made a successful bid for Syngenta, which should close later in the year. Bayer, meanwhile, has made several offers to acquire Monsanto.

These deals could allow the companies to grow by achieving synergies.

Some of these synergies include maximising profits across a larger operating base as well as optimising working capital, capital spending and logistics, Fitch said.

INSET IMAGE: Potash evaporation ponds take on an electric blue colour. (Jassen Todorov/Solent News/REX/Shutterstock)

By Al Greenwood