Fertilizer merger may face regulator scrutiny
Canadian fertilizer producers Potash Corp of Saskatchewan Inc and Agrium Inc agreed to combine to navigate a severe industry slump by boosting efficiency and cutting costs, but the new company’s potential pricing power may attract tough regulatory scrutiny.
The proposed all-stock tie-up announced on Monday comes as industry profits have fallen due to excessive supply and soft farm incomes. It would combine Potash’s crop nutrient production capacity, the world’s largest, with Agrium’s farm retail network, North America’s biggest, plus its own potash mine and fertilizer plants.
Potash shareholders will own 52 percent of the new company, with a market capitalization of $26 billion. Agrium shareholders will own the rest if the deal closes in mid-2017 as planned.
Agrium Chief Executive Officer Chuck Magro will be CEO of the merged company. Potash Chief Executive Jochen Tilk, who will become executive chairman, said the structure would create an “equal partnership”.
“Chuck and I will run this company together,” he said in an interview.
Tilk said he was confident the transaction would receive regulators’ approval as proposed, without the need for divestitures.
But others were skeptical that regulators would approve a company that would control nearly two-thirds of North American potash capacity and almost onethird of phosphate and nitrogen capacity there.
Fertilizer makes up as much as one-third of costs for U.S. corn farmers, who are already hurting due to falling grain prices.
“This deal has some real antitrust concerns,” said Seth Bloom, a US Justice Department veteran who is now at Bloom Strategic Consulting. An antitrust review is unlikely before January, when a new US president takes office, he added.
The merger would leave Mosaic Co as North America’s only other major potash producer.
When just three companies dominate an industry, a merger of two of them is generally considered risky, said a US antitrust expert who requested anonymity to protect business relationships.
Agrium’s Magro said the companies’ plan to wring up to $500 million in synergies out of the deal, such as by combining Agrium’s western North America-based nitrogen business with Potash Corp’s in the East, would make for a more efficient industry.
“In commodities, lower costs will be good for everyone, including the farmer,” he said in an interview.
Annual cost savings would come from areas including distribution and retail integration, production and procurement but not from shutting any potash mines.
The deal would dilute the importance of Agrium’s retail system, which sells fertilizer, seeds and chemicals to farmers, making it less strategically sound in the long term, said Robert Spafford, portfolio manager at Cidel Asset Management, which owns Agrium stock.
“One of the reasons most investors own Agrium is the retail business,” said Spafford. “(Retail) is a much more stable business than the wholesale business.”
The deal may have implications for Canpotex Ltd, which the two companies own with Mosaic. Tilk and Magro said they were committed to keep selling potash to offshore markets through Canpotex.
Each of the three companies has equal sway in Canpotex board votes. Tilk said Mosaic would remain an equal partner, although details must still be worked out.
After the transaction closes, the new company will be based in Saskatoon, Saskatchewan, a key factor in winning over province Premier Brad Wall, whose influence is seen as important.