DEALWATCH: Fertilizer Merger Bodes Well For Industry
May 21 2009 - 5:23PM
Dow Jones News
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.)
(TALK BACK: We invite readers to send us comments on this or
other financial news topics. Please email us at
TalkbackAmericas@dowjones.com. Readers should include their full
names, work or home addresses and telephone numbers for
verification purposes. We reserve the right to edit and publish
your comments along with your name; we reserve the right not to
publish reader comments.)