August 31, 2016

Canada’s Agrium Inc. and Potash Corp. confirmed that they are engaged in talks regarding a merger of equals that would create an agribusiness giant valued at more than C$30 billion.

Although both companies have made official statements that no decision has been made and no agreement has been reached as of yet, Bloomberg News reports that according to unnamed sources, a decision could be announced as early as next week.

Much like what has been occurring in the seed and input industry, fertilizer companies are looking to consolidation as a means of weathering the challenges created from falling commodity prices and a glut of potash on the world market. Spot prices for potash throughout the U.S. Corn Belt fell by 34 percent over the past year, while Potash’s average realized price per ton fell to US$154 in the second quarter 2016 from US$273 last year and US$900 in 2008, according to the Financial Post.

If successful, the deal would combine Potash’s access to 20 percent of the world’s total supply of potash with Agrium’s agricultural product distribution network that saw sales of $15 billion last year. Having access to Agrium’s retail business as a conduit for sales, would give Potash greater access to U.S. farmers, and insulate the company from extreme volatility in crop input prices, according to the Wall Street Journal. Meanwhile, the deal would give Agrium the ability to expand its offerings of potash and other fertilizer products prior to an eventual rebound in prices.

This is not the first time that Potash has recently tried to consolidate and diversify under the direction of CEO Jochen Tilk. Since assuming the helm of the company in 2014, Tilk led the company in the attempted acquisition of Germany-based K + S AG in a hostile $8.7 billion deal, according to The Globe and Mail. However, Tilk walked away from the table, accusing K + S of not being cooperative when the company claimed the offer was too low.

A combined Agrium-Potash entity would dominate North America, and would hold a 62 percent share of the potash market, a 30 percent share of phosphate production, and a 29 percent share of nitrogen production, according to Reuters.

Not surprisingly, the deal is being viewed both positively and negatively.

John Stephenson, president of Stephenson & Co Capital Management told The Star that a combined company would carry more negotiating power and supply discipline, adding, “It would create a blockbuster agriculture company in Canada, and kind of a global blockbuster company as well.”

While Andrew Wong, an analyst with RBC Dominion Securities stated in a research note that the deal would be mutually beneficial given Agrium’s dominance in nitrogen and Potash’s dominance in potash, reports the Global and Mail. He stated that although a merger would not cure the oversupply issue, “We view a potential deal as likely beneficial to Agrium and PotashCorp, while not having a significant impact on overall industry consolidation.”

Meanwhile, Diana Moss, president of the non-profit American Antitrust Institute told Reuters that she would be “very surprised” if the deal received approval from regulators.

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

Whether successful or not, the potential deal between Agrium and Potash is a scenario that has been repeatedly playing out across the agricultural inputs space amid weak markets.

In December 2015 Dow Chemical and DuPont officially announced an agreement for a $130 billion all stock, 50/50 mega-merger of the two chemical and agricultural giants to form DowDuPont. In February, ChemChina officially made a bid of $43 billion for Syngenta AG, which recently received approval from the Committee on Foreign Investment in the United States (CFIUS). Meanwhile, Bayer has been engaged in ongoing negotiations for the takeover of Monsanto, which itself has been reported to be in talks for BASF’s ag unit.

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Lynda Kiernan