Over the last three years, Potash Corp. of Saskatchewan Inc., Canada's giant fertilizer producer, has scrapped two blockbuster deals proposed by two different leaders. Now Jochen Tilk is circling a third with Agrium Inc.
The question analysts are asking is: Why?
"You can come up with a rationale if you try hard enough, but it's still kind of puzzling," said Neil Fleishman, head of research at Green Markets, a unit of Bloomberg BNA. "It seems like a move just to make a move."
Potash Corp. and Agrium, based in Calgary, said last month they're in talks to merge one of the world's largest producers of potash, a commonly used fertilizer for hundreds of years, with a farm supply retailer. If they agree, the deal would be substantial: Potash Corp. was valued at $14.8-billion (U.S.) as of the end of trading Tuesday, while Agrium sat at $13.3-billion.
Such an agreement would allow Potash Corp. to diversify its mining business with Agrium's 1,400 retail outlets across seven countries. Yet it may do little to reverse a 34-per-cent decline in potash prices over the past year, sparked by oversupply, the crumbling of a global export system that had supported prices for decades, and tepid demand from places such as China.
"This isn't a blockbuster deal that would make potash prices soar overnight," Mr. Fleishman said by telephone.
The 52-year-old, German-born Mr. Tilk took the chief executive officer's job in July, 2014, a year after his predecessor, industry icon Bill Doyle, also failed to pull off a deal, at that point with Israel Chemicals Ltd. Mr. Doyle left after overseeing a 12-year, $8.2-billion expansion, leaving a dilemma for Mr. Tilk as prices for his eponymous product slid, pulling his company's stock down as well.
Since the day Mr. Tilk became CEO, the shares dove 44 per cent as of the close of trading on Tuesday. And this year, for the first time in 26 years, the company was forced to cut its dividend in response.
Potash Corp. declined to comment beyond its statement last month. Agrium didn't immediately respond to questions.
Bank of Nova Scotia analyst Ben Isaacson, in looking at one potential gain from a Potash-Agrium deal, calculates potential savings of $300-million, but called that number "a bit of a stretch." Steve Hansen, an analyst with Raymond James, estimated savings at $250-million to $500-million though he admits he's still "a little perplexed" by the proposal.
While the companies say they're exploring a "merger of equals," Potash Corp. will probably have to pay a premium to close the deal, according to Scotiabank's Mr. Isaacson.
The most likely reason for a merger may have little to do with current prices or even savings, according to Andrew Wong, an analyst at RBC Capital Markets. It might be simply to boost Potash Corp.'s market share and sales through Agrium's retail operation at a time when Russia-based Uralkali PJSC, Potash Corp's leading rival, is benefiting from cheaper currencies and is bringing lower-cost mines into production.
Potash Corp. doesn't sell directly to farmers. It delivers mainly to wholesalers buying on the spot market, according to its website. Agrium's profile is a mirror image, with 77 per cent of its sales coming from its retail operation.
Adding to analyst confusion is uncertainty over which company initiated the talks and what Agrium may stand to gain.
While Agrium does some mining, most of its revenue last year came from global retail sales of fertilizers and seeds, a steadier source of cash flow that has pleased investors. Merging with Potash Corp. would subject it to the more cyclical turns of a mining company.