Agrium Inc. and Potash Corp. of Saskatchewan Inc. executives were on the road last week trying to convince shareholders and analysts to go along with their planned merger (GM Sept. 16, p. 1). PotashCorp President and CEO Jochen Tilk and Agrium President and CEO Chuck Magro jointly spoke before the Scotiabank Fertilizer and Chemicals Conference Sept. 20 to make their case.
The CEOs made the case that shareholders of both companies would benefit from the deal. Some analysts have suggested that Agrium shareholders will see any synergy gains go to increased dividends for PotashCorp shareholders, and that they will also see a dilution in the successful retail business while the company puts more eggs in the more volatile commodity basket. “Agrium shareholders are going to participate in the $500 million of annual operating synergies,” said Magro, noting that those will result in a 20 percent increase in the market cap with no help from the markets.
“We have to create value,” said Tilk. “I mean, sitting back and waiting, waiting for the markets to change around you is not about creating value. It’s essentially just being somewhat passive.” Both CEOs said the companies are better together than apart.
Magro said the transaction would mean “financial horsepower to accelerate retail growth. So looking forward, the goal of growing retail by, say, another $400 million of EBITDA over the next several years, that would take Agrium somewhere around $3 billion of investments to deliver that sort of growth.” He said it would be much more accretive to do in the new company than Agrium as a stand-alone. And he noted that while the retail business is the largest in the U.S., that it still has under 20 percent market share and plenty of room to grow. He noted that because of a combination of things so far in 2016, including the current commodity cycle, Agrium has been able to increase retail sales by $500 million, with 65 new locations.
Both CEOs shed a little light on a merged phosphate business. “We saw an opportunity from the beginning that we can put our phosphate assets together and leverage some synergies, but also turn it into a meaningful business and then explore the future of that business together,” said Tilk.
And while Agrium needs PotashCorp’s phosphate rock, Magro said the plan is to turn that rock into phosphoric acid at one of PotashCorp’s plants and ship it to Agrium’s plant at Redwater, Alba. He said it is very realistic that the new company will save $80 million per year by doing this, adding “We’ve run the numbers, and this is quite a value capture.” Agrium currently imports its rock for Redwater from Morocco’s OCP.
The two also talked a little more about potash synergies. Magro said adding Vanscoy to the mix will allow the companies to reduce cost by sharing resources, better managing turnarounds, and improving production planning. He said there is a lot of availability to share resources between the companies’ Saskatchewan potash mines, including the cut in overtime hours at Vanscoy. However, the CEOs reiterated that overall cuts to their estimated 20,000 workforce would be relatively small .
The two indicated that Saskatoon will likely be the “potash” headquarters for the company, while Alberta would be nitrogen, though they said those issues still have to be worked through. Saskatoon is to be the official company headquarters, though the company has said that Calgary will have a corporate office.
As for antitrust issues, the CEOs believe regulators will look at potash as a global market, not strictly U.S., noting that in just the past few years, there is a significant number of companies that can import into the U.S. if they choose to do so and they have done so, and the industry has seen the impact of that in terms of incremental product and prices. They also noted the coming up of new capacity globally as well in North America with the K+S Legacy Project in Saskatchewan. They noted that on the phosphate side of the business, regulators chose to look at a global market with respect to The Mosaic Co.’s acquisition of CF Industries Holdings Inc.’s phosphate assets a few years ago.
As for nitrogen and phosphates, the two reiterated that there simply is not a lot of overlap between the two companies.
The performance of both companies’ shares on the New York Stock Exchange continues to lag. Agrium shares closed at $92.61 Sept. 22, down from $95.21, the day before the merger was announced. In the meantime, shares dipped as low as $88.21. PotashCorp shares closed at $16.32 Sept. 22, still down from the pre-merger $16.97. Shares had dropped as low as $15.83.
CF executives also spoke at the conference and weighed in as to the merger’s impact on their company. CF Senior Vice President of Sale, Distribution, and Market Development Bert Frost said Agrium’s Crop Production Services is a large customer of CF for ammonia, UAN, and urea. “And we expect that to continue to be the case, because they buy economically. They buy what makes the most sense for each of the individual units that receives those products. And some of our locations are more logistically advantageous for them to purchase from, and they are a good customer for us to sell to.”
He said he thinks the relationship will continue, and noted that PotashCorp’s Lima, Ohio, and Augusta, Ga., nitrogen plants are more industrial-based. He noted that PotashCorp’s Geismar, La., is more ag-related and may supply the new company with UAN.