PotashCorp, Agrium propose US$36B merger

VANCOUVER — Potash Corp. of Saskatchewan (TSX: POT; NYSE: POT) and Agrium (TSX: AGU; NYSE: AGU) have unveiled a plan to merge and create the largest crop-nutrient company in the world, and the third-largest natural resource company in Canada. The deal would combine Potash-Corp’s nitrogen and phosphate production assets and Agrium’s agricultural retail network.

The two say the combination would create up to US$500 million in “annual operating synergies” through distribution and retail integration. The companies argue the synergies “imply value creation of up to US$5 billion.”

Under the agreement, PotashCorp shareholders will receive 0.4 share of the new company for each share held, while Agrium shareholders will get 2.230 shares. PotashCorp investors would own 52% of the new company, which would employ close to 20,000 people and have a presence in 18 countries, as well as a pro forma enterprise value of US$36 billion.

“You have to look at timing, but you also have to look at opportunity. The question we’ve had to answer with this combination is whether we’re better together,” Agrium president and CEO Chuck Magro said during a conference call. “Forget about market conditions, because everyone has a view of what that looks like over the longer term. Under any scenario, having a larger, diversified nutrient company would be the best solution. If you try to time the market perfectly, you’ll miss a great opportunity.”

The company’s head office would be in Saskatoon, with PotashCorp CEO Jochen Tilk becoming executive chairman and Magro the CEO. Representation on the board of directors would be split evenly.

“We think [the potash market] is going to be a terrific business over the long-term,” Magro continued. “Of course, there’s new capacity coming online and the competition is pretty fierce. The beauty of the transaction is that the operating synergies are under our control, so we don’t need the market to improve to drive shareholder value.”

The proposed merger comes during a rough period for fertilizer producers. PotashCorp reported second-quarter average realized potash price of US$154 per tonne, which is down from the US$273 per tonne it reported in 2015.

Scotiabank senior fertilizer analyst Ben Isaacson argues that PotashCorp shareholders “likely favour” the deal, which would bring ownership of the Vanscoy potash mine in Saskatchewan, and “provide stability” due to Agrium’s retail earnings. He points out that Agrium shareholders might be less supportive, however, because no premium was paid in the transaction, which would “dilute [the company’s] retail multiple.”

Magro and Tilk do not foresee any anti-trust or competition issues. They both said the new company would stay committed to Canpotex, which is an offshore marketing and logistics venture jointly owned by Agrium, Mosaic (NYSE: MOS) and PotashCorp.

On a 2015 pro forma basis, inclusive of expected synergies, the new company would have had operating cash flow of over US$4 billion per year. A dividend would be maintained at Agrium’s level, which implies a 1.8% yield.

PotashCorp has traded in a 52-week range of $19.93 to $33.70 per share, and at press time closed down 4% at $21.83 per share. The company has 839 million shares outstanding for an $18.1-billion market capitalization.

Agrium has a 52-week range of $104.70 to $121.04, and closed down 3.3% after the announcement at $121.04 per share. The company has 138.2 million shares outstanding for a $16.7-billion market capitalization.