The Strategist

PotashCorp and Agrium Inc. to merge into the largest producer of fertilizers

09/13/2016 - 14:19

Canadian fertilizer producers Agrium Inc. and PotashCorp are going to merge. They will create the largest player in the global fertilizer market with capitalization of $ 36 billion by the middle of 2017.
The largest North American retailer of agricultural products Agrium Inc. and the world’s leading in terms of capacity manufacturer of fertilizers Potash Corporation of Saskatchewan Inc. (PotashCorp) have agreed to merge. The parties will establish a parent company, in which PotashCorp will receive 0.4 shares for each of its ordinary share, and Agrium’s shareholders - 2.23 shares for a paper. As a result of the transaction, PotashCorp will own approximately 52% of the new company, Agrium - 48%. Once the deal is signed, the new company will become the largest player in the global fertilizer market. The transaction is expected to be closed by the middle of 2017.

CEO of Agrium Chuck Magro, who will head the new company, says that the merger "creates advantages and opportunities for growth, which none of the companies would not achieve alone." CEO of Potash Jochen Tilk will head the board of directors. Market cap of the combined company, which will be named near closing of the transaction, will be about $ 36 billion. Net revenue before the synergy will bring around $ 20.6 billion, and the rate of EBITDA is expected to number $ 4,7 billion. Annual synergy is valued at about $ 500 million.

The merger should help Potash Corp. protect its profits by taking advantage of stable retail bonds of Agrium, which sells fertilizer and seeds to farmers. During the first half of the year, Agrium’s retail business brought $ 8,1 billion in revenue, a decrease of 3.6% compared to the previous year, while revenue from the sale of fertilizers fell by 25% to $ 1.5 billion for the same period. The transaction will increase Agrium’s range of products.

Potash Corp. earlier tried to buy one of the largest potash producers, German K + S. The deal was primarily estimated at EUR 7.8 billion, but eventually the company decided to abandon those plans in last October.

In these latter days, the potash market has experienced great pressure from macroeconomic conditions, such as slowed growth of GDP, decline in oil and commodity prices, spurred devaluation of national currencies of major grains and oilseeds producers. All of this, in turn, have significantly cut purchasing power of farmers.

The weather has also been and remains an important factor for the fertilizers market. Negative impact of a natural phenomenon El Nino (unusually warm ocean temperatures in the Equatorial Pacific), which caused drought in Southeast Asia, led to reduced production and higher prices for palm oil. In turn, monsoon in the Central American markets has been delayed by more than two months, and there was a severe drought in South Africa. For this reason, farmers have been forced to postpone the fertilization season.

China, the key player in the fertilizer market, exerts serious influence on the potash market. In 2016, low demand from China and India, and prevalence of "random" transactions on the spot market led to a further reduction of prices for potash fertilizers in the I quarter of 2016. This is showed in a report on the global fertilizer market’s development, prepared by Potash Corp. for an annual conference of the International Fertilizer Industry Association (IFA), held in Moscow in June 2016.