Fertilizer giants Potash Corp. of Saskatchewan Inc. and Agrium Inc. left the door ever so slightly open to a competing offer for their companies after they were forced Tuesday to reveal that they are working on a multibillion-dollar merger. Rival resource companies are duty-bound to see whether they can squeeze through that crack, egged on by bankers anxious to play a role in the biggest commodity deal in years.
As the latest converts to the logic that bigger is better when it comes to commodities, Potash and Agrium are talking about a "merger of equals" that would create an entity worth more than $35-billion.
That approach dictates that neither company's shareholders receive a takeover premium, and there's no cash – only an exchange of shares.
If the two companies reach a deal, they will pitch investors on the long-term benefits of their union, such as cutting costs and increasing pricing clout with farmers.
While we're all supposed to share that view, investors have repeatedly shown that when it comes to takeovers, they prefer short-term rewards, in the form of rich cash offers.
So while Potash and Agrium rush to put the finishing touches on their merger, the handful of resource companies that can afford the $20-billion-plus price tag of crashing this party are crunching numbers and weighing a takeover bid for one of the Canadian companies. An M&A lawyer who has worked with both Potash and Agrium, but is not involved in this deal, said the mindset for CEOs in the sector is: "We have to at least look at our options, because this is our one great opportunity to establish a dominant global franchise."
Speculation on rival bids, along with the synergies that would come from a union of two massive fertilizer companies, boosted Potash stock by 11.5 per cent and Agrium by 7.3 per cent in trading on Tuesday. And in what is usually one of the quietest weeks of the year on Bay Street, the prospect of $100-million or more in M&A fees had investment bankers frantically preparing pitch books for potential rival suitors.
It's no secret that commodity company CEOs are keen to consolidate. Australia's BHP Billiton took an unsuccessful run at Potash Corp. in 2010 – the federal government scotched that deal. Potash was in turn thwarted last year in its bid for Germany's K+S AG. As recently as June, Potash stock briefly jumped on rumours that BHP Billiton was ready to take another shot.
However, the market dynamics today are dramatically different from what drove the commodity craze of the past decade, when multiple foreign bidders emerged for iconic Canadian mining companies Inco, Falconbridge and Alcan.
Most global mining companies are still nursing hangovers from that era, in the form of debt-heavy balance sheets, which preclude a hostile offer for either Potash, likely the most coveted target as a pure play on fertilizer, or Agrium.
The list of companies that would look at busting up a made-in-Canada fertilizer marriage starts with BHP Billiton. But analysts say a more appropriate target for BHP would be Mosaic Co. of Minnesota, if only because the Australians don't need Industry Canada's blessing to buy an American company.
Chicago-based Archer-Daniels-Midland Co. is going to be pitched by the Street, as it has the required financial heft and has shown interest in foreign expansion. Switzerland's Glencore PLC and Brazil's Vale SA are also going to hear from investment bankers, but both are focused on paying off debt through asset sales. While there are major Russian fertilizer companies, it's hard to imagine these cartels targeting Agrium or Potash.
Far less likely, but far more intriguing, is the prospect of a state-backed entity from China wading into this transaction, potentially with backing from a financial player such as a Canadian pension fund. One Bay Street M&A veteran said Tuesday, "With [Justin] Trudeau in the country, I think China will seize an opportunity to say we would like to bid on assets like this, and ask the Prime Minister for guidance."
Potash and Agrium made themselves targets on Tuesday by revealing merger talks. There is now pressure on the two Canadian companies to get a deal announced, sell investors on its merits and close the door to rival offers. Because as we've seen in the past, megamergers can go in unexpected directions.
Potential Party Crashers
These commodity companies may look at bids for Potash Corp. or Agrium.
- BHP Billiton: The Australian miner bid for Potash in 2010, but was turned down by the federal Conservative government
- Glencore: The Swiss conglomerate knows agriculture, but is hamstrung by heavy debts
- Vale: Brazil’s biggest mining company is a potash producer, mired in debt and a recession in its home country
- Archer-Daniels-Midland: Giant U.S. agriculture company had an Australian takeover nixed last year