A merger between Potash Corp. of Saskatchewan Inc. and Agrium Inc. will face steep antitrust hurdles in Canada and the United States, as the Canadian fertilizer producers vie to become a global agriculture powerhouse.
The companies, which are in preliminary talks to merge, are two of the three major potash suppliers in North America, as well as big players in other crop nutrients such as nitrogen and phosphate.
The potential deal, with a combined market value of $37-billion, would increase their market share in fertilizer and put them in the crosshairs of antitrust regulators on both sides of the border.
"It's going to be very heavily scrutinized," said Chris Hersh, an antitrust lawyer with Cassels Brock & Blackwell LLP. "You see major overlaps in both potash and nitrogen. They compete with each other and the marketplace is a fairly concentrated marketplace."
Saskatoon-based Potash Corp. is the world's largest producer of fertilizer by capacity and controls nearly half of potash capacity in North America. A merger would boost its position to 62 per cent, and give the new company a 30-per-cent market share in nitrogen and a similar position in phosphate, according to National Bank Financial.
A merger would leave one main potash rival in North America – U.S.-based Mosaic Co., which controls 35 per cent of the capacity in the market. In Canada, Potash Corp. operates five potash mines in Saskatchewan and Agrium operates one in the province.
"Potash capacity would become highly concentrated among a single producer," Greg Colman, an analyst with National Bank Financial, said in a research note.
It's not just potash production that would raise red flags for regulators. Calgary-based Agrium owns more than 1,400 retail shops in the Americas and Australia, where it sells fertilizer directly to farmers. Although Potash Corp. does not have retail outlets, the merged company would have greater control over the entire fertilizer supply chain – and therefore might hold greater influence over prices at the retail level.
If the companies reach a deal, the U.S. Federal Trade Commission or Department of Justice, as well as Canada's Competition Bureau, would scrutinize the merger and likely seek input from all stakeholders, such as farmers.
The National Farmers Union, which represents more than 200,000 farmers, fishers and ranchers in the United States, has already said it opposes the tie-up. "Family farmers, ranchers and consumers are the ones that lose out when we cripple competition, increase prices and reduce innovation through industry mega-deals," said Roger Johnson, the union's president.
Canadian farmers expressed similar concerns. "Taking out one competitor is never a good thing," said Barry Senft, chief executive of the Grain Farmers of Ontario, which represents 28,000 farmers.
Some, though, acknowledged a preference for a Canadian-owned company.
Gary Stanford, an Alberta farmer and president of the Grain Growers of Canada, said the Competition Bureau has consulted with him in the past over other industry mergers. He said some of his 50,000 farmer members are worried about fertilizer prices increasing but that he wanted to see strong Canadian companies compete with foreigners. "There are other major companies in the world. I don't want to have to be reliant on them in the future."
The companies have not provided details on the structure of the deal, such as mine closings or asset sales – divestitures that could be required to ease competition concerns. There's no guarantee a deal will happen, but investors have bid up the shares of both companies this week in anticipation of an agreement. Potash has risen 11.6 per cent and Agrium 8.6 per cent since Monday's close in Toronto.
"This deal is not going to get a green light without any remedies. The question mark is whether they can provide sufficient remedies to address the concerns … as opposed to getting the deal blocked," said Mr. Hersh of Cassels Brock.
The United States is grappling with rapid consolidation in the agriculture industry, with deals between Dow Chemical Co. and DuPont Co., and China National Chemical Corp. and Syngenta AG, as well as potentially between Monsanto Co. and Bayer AG.
The U.S. Justice Department recently sued to stop Deere & Co. from buying Monsanto's Precision Planting farm equipment business, saying the acquisition could make it more expensive for farmers to plant crops.
A Potash Corp.-Agrium union may have an easier time under Canadian rules. The Competition Bureau has an "efficiencies" provision, which allows the federal agency to approve a deal if efficiencies such as cost savings and operational benefits outweigh anti-competitive concerns.
This is the second time Potash Corp. CEO Jochen Tilk has tried to consolidate the industry. Last year, the company tried to buy German rival K+S AG but was rebuffed. Owning nearly two-thirds of the potash capacity in North America would give the combined company the ability to control more of the supply as new players enter the market.
K+S and Anglo-Australian company BHP Billiton Ltd. are developing big potash projects in Saskatchewan. Outside of North America, Russian and Belarussian producers are ramping up production, and Switzerland's EuroChem is developing two large potash mines.
A glut of potash in the world, along with the 2013 dissolution of the Russia-Belarus potash cartel, has depressed prices. Potash Corp.'s average realized price for potash was $154 (U.S.) a tonne in the recent second quarter, compared with more than $400 a tonne in 2012.
The company shut down its recently opened potash mine in New Brunswick and has curbed production in Saskatchewan, where the rest of its mines are located.
North American farmers will pressure regulators to protect their negotiating leverage with fertilizer suppliers if Potash Corp. of Saskatchewan and Agrium Inc. agree to merge, major farm groups said on Wednesday.
The potential deal revealed on Tuesday would combine the world's largest fertilizer producer by capacity with the continent's biggest network of farm-retail dealers and consolidate 60 per cent of North America's potash production within one company.
The tie-up would face regulatory scrutiny in both Canada and the United States.
For farmers, already facing the prospect of fewer buying choices for seed and chemicals, the potential merger raises fears they will lose pricing power. Independent retailers in Canada and the United States worry about competing against a fertilizer Goliath that may stock its stores at preferential rates.
"It's like the movie Mad Max – one company owns everything," said Norm Hall, president of the Agricultural Producers Association of Saskatchewan. "There's less and less competition out there. We're being painted into a box because of corporate greed."
The group, based in Canada's largest crop-growing province, will raise concerns with the federal Competition Bureau if the merger proceeds, Mr. Hall said.
Likewise, Manitoba's Keystone Agricultural Producers will ask the agency to weigh the risk of higher farm costs, president Dan Mazier said.
The Competition Bureau routinely contacts industry groups when it reviews proposed mergers, spokeswoman Sophie Paluck-Bastien said.
The American Soybean Association, which represents 21,000 U.S. farmers, might complain to U.S. regulators if the merger advances. It opposes deals that limit competition and drive up prices, spokesman Patrick Delaney said, noting the combined company would be "dominant" in North America.