Potash Corp of Saskatchewan (POT) holds the leading position in the potash industry, with 22% of world capacity. The lead may prove tenuous: Agrium Inc. (AGU), CF Industries (CF) and Terra Industries (TRA) are all in consolidation mode.

Mergers among these smaller players would not create a company big enough to displace Potash in the near term. But in the long term, a merger would release significant value and transform the competitive landscape.

Agrium launched its $3.5 billion bid for CF Industries one month after CF launched its own $2.5 billion bid for Terra Industries.

The companies' low debt loads make the acquisitions very attractive. Net debt to earnings before interest, taxes depreciation and amortization for the CF/Terra combined company would stand at an unreal -0.5x. There would be more than enough cash and earnings power to cover acquired debt. The Agrium/CF combined company would have a ratio of 0.4x. Potash Corp stands at over 0.6x.

An Agrium/CF combination's transportation and operational overlaps would create an expanded footprint in North America, and the companies expect annual synergies of around $100 to $150 million.

Agrium is also looking to capitalize on vertical integration of CF's wholesale distribution platform.

"Lacking a retail distribution network (unlike Agrium's), CF's product line is very attractive to Agrium which could apply it to their existing platform to increase margins in geographical regions in North America where CF is dominant from a wholesale perspective only," said Richard Kelertas, an analyst with Dundee Securities.

Acquisitions are not new to Agrium, which has bought nine companies in the last four years, the largest being UAP Holding Corp, which it acquired for $2 billion in late 2007.

CF declined Agrium's first offer, but has not responded to a 15% richer second bid of $82.50 a share.

Conditions in the fertilizer market are not as pristine as the companies' balance sheets.

In the past, fertilizer demand from emerging economies has been a key driver in the profitability of potash companies. Currently, however, emerging market demand is hard to forecast as import negotiations with China remain unresolved for at least the next month or two. Potash, Agrium and Mosaic Co. (MOS) have all responded with output cuts. No new plants are expected until 2012.

Companies are optimistic that demand will turn around in the second half. Potash Corp CEO Bill Doyle commented that North American farmers are planning on planting the same amount of crops as last year, and a spring drought in China could spur global demand.

In the meantime, Potash prices remain historically high, dampening demand worldwide. The last negotiated prices, for the 2009 and 2010, were around $550 per metric tonne in China, and $750 in Korea and Japan. The average price between January 2003 and January 2008 was around $150 per metric tonne. Fertilizer prices have replaced transportation as the number one cost input for farmers.

Even though either combined company won't displace Potash Corp's dominance, both deals signify a new challenger is emerging.

(Kevin M. Nichols is a columnist for Dow Jones Newswires on the energy, industrial and auto sectors. He has more than seven years experience as an analyst and trader on Wall Street and was formerly an executive in the proprietary trading unit at an investment bank. He can be reached at +1 (201) 938-2417 or by email: kevin.nichols@dowjones.com. Dow Jones Newswires is enhancing its news, commentary and analysis for the investment banking community, and is providing it on this service temporarily. To ensure continued access to the best of Dow Jones news and opinion on companies, sectors and deals for bankers and research analysts, please contact investmentbanker@dowjones.com.)

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