Lovers and haters of the merger of Agrium Inc. and Potash Corp. of Saskatchewan Inc. have to agree on a couple of things – it's a sign of the times and the reasons cross industry lines.
The fertilizer business, so integral to life in a world that has to eat, has become one that demands economies of scale and rock-bottom costs owing to weak prices for its commodities and expectations of more of the same.
Since the deal was made formal on Monday, some analysts have questioned the half-billion-dollar cost savings that Agrium and Potash executives are promising, and investors are lamenting the lack of a premium for their shares in the merger-of-equals setup.
The companies tout the creation of a $36-billion Canadian champion, with the globe's largest collection of fertilizer assets. But in a chronically glutted market, it must be a Canadian survivor first.
A glance around downtown Calgary, 12 kilometres north of Agrium's headquarters, shows similar market conditions in a different, though related, industry – the oil patch. Don't bet against companies running the numbers on similar large mergers.
The sector, itself key to a modern life of transportation, power and heat, is entering the third year of a commodity-price slump that has eliminated many of the smaller companies that previously assumed endless high prices would make debt-funded growth manageable.
The largest Canadian oil companies have come through the worst of the price crash with relatively healthy balance sheets, but with far fewer employees and assets, lower stock prices, smaller and mostly symbolic dividends and expansion plans that are modest at best.
Meanwhile, the cost of entry into the business – whether oil sands development or hydraulic fracturing – has surged out of reach for small players that in previous years could have started up on little more than ambition. It's a big kid's game.
Just a few months ago, numerous forecasters expected supply and demand in the world's oil markets to start balancing out late this year. That outlook became far less certain this summer as U.S. crude hovered just above $40 (U.S.) a barrel. On Tuesday, the International Energy Agency dashed any remaining hope of imminent recovery.
The Paris-based IEA said global oil demand is lagging previous expectations, and production and inventories are exceeding them. These factors will combine to extend the glut until at least the middle of next year.
The grim report pulled the price of crude down sharply, and sent the shares of many Canadian oil companies well into negative territory. Clearly, investors are weary of the downturn's extended engagement.
Like the fertilizer industry, the energy sector is becoming a slow-growth sector that demands deep pockets and diversified revenue – the kind of business that favours big mergers that can lead to cost cutting during lean years.
It's not a new concept. Previous tough times have produced big energy tie-ups that were also trumpeted as births of Canadian champions, such as that of PanCanadian Energy and Alberta Energy Co., which created Encana Corp. in 2002, and Suncor Energy Inc.'s $18-billion (Canadian) takeover of Petro-Canada seven years later.
Among oil majors, Chevron Corp. bought Texaco, BP acquired Amoco, Exxon absorbed Mobil and Conoco snapped up Phillips in multibillion-dollar deals during the downturn of the 1990s and early 2000s.
Over the past year, Suncor has played consolidator again, bulking up on Syncrude Canada interests by acquiring Canadian Oil Sands Ltd. for $4.2-billion, then snapping up Murphy Oil Corp.'s 5-per-cent stake for $937-million.
Enbridge Inc.'s friendly, $37-billion deal with U.S.-based Spectra Energy Corp., announced last week, represents a bid to create a Canadian energy transport champion that is diverse along geographic and business lines.
Oil and gas producers remain at the mercy of commodities, whose recovery keeps pushing out toward the horizon, and that will prompt boards to consider the deal route after in-house cost cutting and asset sales.
Not everyone will be in favour of such deals, but one thing's for sure – the industry's pretty much exhausted all its other options for appeasing investors.