Coverage: Two fertilizer companies in talks to combine

Canadian fertilizer giants Agrium Inc. and Potash Corp. are in talks about a possible merger of equals that would create a company worth $28 billion as the industry contends with lower earnings.

Ben Dummett of The Wall Street Journal has the news:

For the first six months of this year, Agrium’s retail business generated sales of $8.1 billion, down 3.6% from the year-ago period. By comparison, the sales at its smaller wholesale fertilizer operation fell 25% to $1.5 billion over the same period.

For Calgary-based Agrium, a deal would greatly expand its product of potash and other fertilizer ingredients, representing a bet that demand and prices for these products have bottomed and are poised for a rebound.

Potash “deliveries in the second half of 2016 are expected to be supported by…the normal seasonal upturn in demand and the recent supply agreements with China and India,” two of the world’s biggest markets for the crop nutrient, Agrium said earlier this month in its earnings release.

In New York, Potash stock rose 11% to $17.84, giving it a market capitalization of about $15 billion, according to FactSet. Agrium has gained 6% to $94.84 for a total value of about $13 billion.

Jen Skerritt, Scott Deveau and Eric Lam of Bloomberg News reported that the deal would likely clear regulatory hurdles:

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.

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.

Rod Nickel and Diane Bertz of Reuters, however, report that there would be a huge U.S. regulatory review:

A merger would give Potash a direct channel to U.S. farmers through Agrium’s retail stores, which as of May accounted for 17 percent of the U.S. market. Industry watchers said this and other factors would catch the attention of U.S. regulators.

“I can’t predict what they (U.S. and Canadian regulators) would do but this one would come under intense scrutiny,” said Bob Taylor, an economist and professor emeritus at Auburn University’s College of Agriculture.

A combined company would be dominant in North America, controlling 62 percent of potash capacity, 30 percent of phosphate production capability and 29 percent of nitrogen capacity, National Bank analyst Greg Colman said.

Diana Moss, president of the American Antitrust Institute non-profit group, said she would be “very surprised” if antitrust regulators approved such a merger.

“This is bad for the American farmer and the American food consumer,” she said. “The farmer is in the middle of a squeeze play.”