Fertilizer giants Potash Corp., Agrium ink $36-billion tie-up

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Potash Corp. of Saskatchewan Inc. and Agrium Inc. are joining forces to create a made-in-Canada agricultural champion with the heft to compete in a glutted global market for fertilizers.

The combined entity, which has yet to be named, is expected to have an enterprise value of $36-billion (U.S.), making it the largest crop nutrient company in the world.

"This company will be a Canadian champion that can provide leadership in the natural resource sector," Agrium chief executive officer Chuck Magro said in an interview. "Canada has been hollowed out, and this is an opportunity to create a leading company."

Mr. Magro will be CEO of the combined companies, while Potash Corp. boss Jochen Tilk will serve as executive chairman.

Prices for potash and other fertilizers have been sliding for years and the all-stock deal represents an intriguing attempt to generate value despite the dismal market for the companies' key products. The companies say they can slash expenses by $500-million a year through reducing administrative costs, sharing storage and shipping networks, and using mines and factories more efficiently.

"The competition is quite fierce right now, but the beauty of this transaction is that the $500-million of annual costs savings are under our control," Mr. Magro said. "We don't need the market to improve to drive value creation."

Other companies that cater to the farm market are already following the bigger-is-better trend. E.I. du Pont de Nemours & Co.and Dow Chemical Co. are pursuing a complex $69-billion merger, Germany's Bayer AG is bidding $55-billion for agrochemical giant Monsanto Co. and China National Chemical Corp. is buying Swiss pesticide and seeds maker Syngenta AG for $43-billion.

Some analysts expressed doubts, however, about the potential cost savings from combining Potash Corp. and Agrium. Joel Jackson of BMO Nesbitt Burns said in a note that he was "initially skeptical" about whether the projected economies could be achieved. His forecast was for no more than $300-million in savings.

UBS analysts cautioned that the merger is unlikely to significantly boost the combined company's pricing power given the glut of fertilizers around the world. Potash Corp. has shuttered mines in an attempt to support prices.

Despite its efforts, spot prices for potash in the U.S. corn belt have plunged by a third over the past year and potash prices in general have sunk below $250 a tonne, far below the near $900-a-tonne level reached during the commodity frenzy in 2009. Fresh capacity, including a new Saskatchewan mine owned by K+S AG of Germany, is still flooding onto the market.

The merger appears to signal a belief that the hard-hit market has reached a bottom. One promising aspect is the new link it forges between Potash Corp.'s enormous capacity to produce fertilizer and Agrium's retail network, which sells directly to farmers.

Agrium's retail arm "buys about 10 million tonnes of fertilizer annually and we buy less than 200,000 tonnes from Potash Corp. today," Mr. Magro said. "So this is a massive integration opportunity."

To be sure, the size of that opportunity will draw scrutiny from regulators. The combined entity will employ 20,000 workers in 18 countries and control slightly less than 20 per cent of the world's total potash capacity.

On a conference call with analysts, Mr. Magro and Mr. Tilk said much of the two companies' output is complementary, with Agrium's nitrogen assets concentrated in western North America while Potash Corp.'s production is tilted more to the east.

In addition, the stream of new potash capacity coming onto the market should dampen concerns about the clout of a combined Agrium-Potash Corp., they said.

Potash shareholders will own 52 per cent of the combined entity, while Agrium shareholders will hold 48 per cent. The registered head office will be in Saskatoon, home to Potash Corp., and the company will have corporate offices in both Saskatchewan and Calgary, where Agrium has its headquarters.

The two architects of the deal stressed that a merged company has the financial muscle to do more deals and will be keen to do so once the businesses are integrated.

The new company will have "the biggest, baddest balance sheet in our space," Mr. Magro said.

"This model can be replicated around the world," he added. "We're creating a Canadian champion that can compete in the crop nutrient space around the world."

The CEOs said in an interview that they started talking a year ago about a relatively small deal that would unite their two phosphate businesses, then gradually realized the opportunities in a wider combination.

While a rival miner such as BHP Billiton Inc. may attempt to break up this marriage with a hostile bid for one of the partners, sources close to the two companies say such a bid is unlikely, given the size of both companies.

Merger puts future of Canpotex governance into question

The proposed merger of Potash Corp. of Saskatchewan Inc. and Agrium Inc. has cast a spotlight on the future of Canpotex Ltd., the organization that markets Saskatchewan potash outside of North America.

Both Chuck Magro, chief executive officer of Agrium, and Jochen Tilk, CEO of Potash Corp., said on Monday that they intended to continue with Canpotex despite concerns that the organization might be redundant in a post-merger world.

"We're committed to Canpotex, we see the value and … we will be as committed [after the merger] as we are now," Mr. Tilk said.

What is not so clear is how Canpotex will be governed. As it now stands, the organization's shareholders include Mosaic Co. of Minneapolis as well as the two Canadian companies. Each of the three producers has a single vote.

Analysts have speculated about whether a combined Agrium-Potash Corp. would own two votes or one. When asked that question on Monday, Mr. Magro appeared to suggest the merged entity would wield only a single vote, but came up short of saying so explicitly.

"We see our partners as equal partners in this and we expect that to be an equal, fair and functional partnership," he said.

When asked how disagreements might be settled in such a relationship of equals, the chief executives said they saw no reason the issue should arise.

"I don't think there has been a disagreement in 40 years," Mr. Tilk said. "We have been very well aligned and we don't anticipate that to be an issue going forward."