Agrium and Potash Corp. to Merge, Creating Fertilizer Giant
By LESLIE PICKER and IAN AUSTEN
As chemical and agricultural products producers face pressure to grow, two of the world’s largest crop fertilizer makers have agreed to combine in the latest farming industry deal.
The companies, Agrium and the Potash Corporation of Saskatchewan, announced their all-stock merger on Monday after weeks of speculation. The two Canadian companies produce the materials — nitrogen, potassium compounds known as potash, and phosphate fertilizers — that farmers use to raise healthy crops, and their combination would create the largest crop nutrient company in the world.
But fertilizer prices have recently come under pressure because of supply gluts and newer competitors, and demand has also softened. The deal enables the companies to cut $500 million of their combined costs annually over the next few years to help them withstand some of the new market dynamics.
“The beauty about this transaction though is the $500 million of annual operating synergies that are in our control,” Charles V. Magro, president and chief executive of Agrium, said in a conference call with analysts on Monday. “We don’t need the market to improve to drive shareholder value.”
Shareholders seemed a bit more skeptical. After the deal closes, Potash shareholders will own 52 percent of the new company, while Agrium’s investors will own 48 percent. The stocks of both companies declined on Monday, with Agrium about 3 percent lower, and Potash slipping more than 1.5 percent. One possibility for the declines: The deal does not have a premium.
The combination would help Potash, which produces half the potash in North America, reduce its exposure to volatile prices for the potassium product. Agrium has a big presence among farm-retail chains, enabling it to produce more stable earnings than wholesale fertilizer, according to a Sept. 1 report by Fitch Ratings after word of preliminary talks between the two companies came out. A combination “will improve market reach and allow the company to optimize its product margins,” Monica Bonar, a senior director at Fitch, said in the report.
The deal follows others that involve the farming industry, including the pending merger between Dow Chemical and DuPont to create a company that would eventually break into three parts, one of which would focus on agricultural chemicals. In addition, China National Chemical Corporation, or ChemChina, has agreed to acquire seed and farm chemicals producer Syngenta. And the German industrial giant Bayer has been in back-and-forth negotiations with Monsanto, the American company known for its genetically modified crop seeds.
Some farm groups have raised concerns about the effect of a merger of Agrium and Potash on fertilizer prices. Yet there has been little public outcry since the two companies said on Aug. 30 that they were in talks.
“I don’t think the rank-and-file farmers are excited” about the deal, said Wade Barnes, president and chief executive of Farmers Edge, an agriculture technology company. “When two manufacturers come together, there’s less optionality of who to buy from, so the price point will probably be higher for them.”
The heads of the two companies brushed aside criticism. “It’s going to be a benefit for the farming community” because the new company will be more competitive, Mr. Magro said in the conference call.
The deal will require regulatory and competition reviews in Canada as well as by American regulators.
In Canada, the Liberal government of Prime Minister Justin Trudeau has not raised any concerns about the merger, at least publicly.
Philip Proulx, a spokesman for Navdeep Bains, Canada’s minister of Innovation, Science and Economic Development, said that the government anticipates that the Competition Bureau will review the merger. But he noted that his department, which describes itself as a law enforcement agency, “conducts merger reviews independently of the government.” If its review leads to concerns which the two companies are unwilling to resolve, the Competition Bureau could challenge the merger through the Competition Tribunal, a specialized court.
Six years ago, when demand from China was pushing up the price of potash, the Australian mining giant BHP Billiton tried to acquire the Potash Corporation The takeover bid immediately prompted a political backlash among critics, including some traditional advocates of open investment policies.
After a request by the province of Saskatchewan, which founded Potash in 1975 and sold it to the private sector it in 1989, the Conservative federal government at the time effectively killed the deal using foreign investment review laws.
Sinochem in China also prepared to make a bid but withdrew it, apparently because of Canadian government opposition.
Reflecting the decline in fortune of the potash industry, the $36 billion value of the merged companies is well below the $39 billion BHP proposed to pay for Potash alone.
Potash said the average price for its commodity during the second quarter of this year was $154 a metric ton. At the height of the battle with BHP, prices reached as high as $900.
Potash has mothballed a recently opened mine in the eastern Canadian province of New Brunswick and temporarily closed some operations in Saskatchewan, the center of the industry in Canada. Mosaic, another Potash Corporation producer based in Plymouth, Minn., has also closed a mine in Saskatchewan, citing low prices.
The name of the combined Agrium and Potash Corporation, which will have about 20,000 employees, is to be determined before the deal closes. The companies expect to generate cost savings from combining their distribution and retail operations, production and back-office capabilities.
The companies also said they were committed to Canpotex, a cartel for controlling potash prices. It is jointly owned by Agrium and Potash, as well as a Mosaic Company subsidiary.
Mr. Magro will become chief executive of the combined company, while Jochen Tilk, the president and chief executive of Potash, will become its executive chairman. The new company’s board will have an equal number of directors from each company.
Potash had a $14.3 billion market valuation as of Friday’s close, while Agrium’s was $13.2 billion. Under terms of the deal, Potash shareholders will receive 0.400 common shares of the new company for each of their shares, while Agrium shareholders will receive 2.230 common shares of the new company.
After the close of the deal, the company will seek a dividend similar to Agrium’s, adjusted for the new number of shares. The dividend would be subject to market conditions and board approval. Its legally registered head office will be in Saskatoon, Saskatchewan, where Potash is based, with corporate offices in Calgary as well.
The deal, which has been approved by the boards of both companies, is expected to close in mid-2017, depending on approvals by regulators, the Canadian court and shareholders.
Agrium’s financial advisers in the deal included Barclays and CIBC Capital Markets, while Bank of America Merrill Lynch and RBC Capital Markets advised the Potash Corporation. Agrium’s legal advisers were Blake, Cassels & Graydon; Norton Rose Fulbright, Canada; Paul, Weiss, Rifkind, Wharton & Garrison; and Latham & Watkins. Stikeman Elliott and Jones Day provided legal counsel to the Potash Corporation. Morgan Stanley advised both Agrium and the Potash Corporation.