Sector News

Potash producers Potash Corporation of Saskatchewan Inc. and Agrium Inc. are discussing a merger of equals, both companies say.

The announcements confirm earlier reports, with Bloomberg reporting that a deal could be announced as soon as next week. However, “no decision has been made as to whether to proceed” with a transaction, according to PotashCorp and Agrium.

A PotashCorp-Agrium merger would be the latest salvo in ongoing agchems consolidation—this time in fertilizers. China National Chemical Corp.’s takeover of Syngentia AG is set to close later this year, and Bayer AG is reportedly getting closer to a deal with Monsanto Co. Combining agchems businesses was also a key factor in the Dow Chemical Co.–DuPont merger.

PotashCorp shares surged 10% this morning on the news, to about $17.70 per share. Agrium shares were up about 6% this morning, to around $94.90 per share. Rival potash producers CF Industries Holdings Inc.’s and Mosaic Co.’s shares also surged even as the Dow Jones Industrial Average declined slightly this morning.

Fertilizer and potash markets have been depressed recently, dragged down by the same ag-sector weakness that has hit companies like Monsanto and Syngenta. PotashCorp’s second-quarter earnings and sales declined by 71% and 39%, respectively, while Agrium’s were down 16% and 8%. Earlier today, PJSC Uralkali, another potash maker, reported double-digit declines in sales and EBITDA in the first half of 2016.

“Softer crop prices are seen as a major reason for the talks,” says Bala Suresh, senior consultant and director with IHS Chemical. “Prices of fertilizers, especially potash, have fallen from about $450/metric ton in December 2012 to currently about $200/metric ton due to weak demand and oversupply.” The deal would also improve PotashCorp’s access to farmers through Agrium’s retail business, Suresh adds.

The combined company would have about $21 billion per year in revenues. PotashCorp and Agrium have similar market caps, at $15 billion and $13 billion, respectively, but Agrium’s revenues are higher than those of PotashCorp.

The biggest price drops drops this year have been in China and India, due to lackluster demand, producers say. Uralkali says that export contract negotiations in India and China have dragged on through the year, while PotashCorp reports delayed contracts in both countries during the second quarter as well as “cautious buying” in other Asian markets.

Demand has held up better in North America, however—the home market of PotashCorp and Agrium, both of which are Canadian. Second-quarter demand was healthy in North America and Latin America, according to Agrium, while Uralkali says activity in the United States and Brazil picked up in the first half.

In response to these pressures, firms have sought to consolidate and diversify. Agrium agreed to acquire Cargill Inc.’s agricultural-retail business in the United States in July. Around the same time, PotashCorp reportedly received an unsolicited takeover offer. PotashCorp pursued German potash maker K+S AG with an $8.7-billion bid last year but was rebuffed.

Fertilizer mergers would make sense, analysts say—a view that is reinforced by market reaction to news of the deal. “This is a merger that makes a lot of sense, and in an industry that is well overdue for consolidation,” says Jonas Oxgaard, an analyst with Bernstein (London). The deal could generate about $150-$300 million per year in cost savings, Oxgaard adds.

Monsanto rejected two bids from Bayer earlier this summer, prompting the latter company to consider a hostile bid. However, a Bloomberg report last week indicates negotiations between the two companies may be advancing.

By Vincent Valk

Source: Chemweek