Distribution in Focus with Potential PotashCorp (POT), Agrium (AGU) Merger - Fitch

The potential merger of chemical companies Potash Corporation of Saskatchewan (PotashCorp) and Agrium Inc. puts distribution in focus, according to Fitch Ratings. Potash and Agrium said this week that they are in preliminary talks regarding a potential merger of equals.

Agrium's growth has been driven by acquisition of large farm retail chains, and earnings in this business have been more stable relative to the wholesale fertilizer business. PotashCorp's potash fertilizer business is significantly larger than Agrium's and comprises roughly half of North American capacity.

Agrium's retail gross profits for the first half of 2016 were up $46 million from the first half of 2015 to $1.7 billion, compared with wholesale gross profits, which were down $289 million from the first half of 2015 to $354 million. The wholesale segment comprises the company's nitrogen, potash and phosphate fertilizer businesses.

PotashCorp's gross margin declined $901 million for the first half of 2016 from the first half of 2015 to $477 million. Fitch believes potash prices have bottomed with curtailed production but that price appreciation could be modest through 2018 given low crop prices and high stocks.

The potential Agrium/PotashCorp transaction follows the abandoned CF Industries/OCI transaction and PotashCorp's abandoned bid for K&S in the fertilizer sector along with Bayer's bid for Monsanto, the DowDupont merger of equals transaction, and ChemChina's agreement to acquire Syngenta in the seeds /herbicide/pesticide sector. Consolidation in the sector is being driven by low valuations, synergies, and longer term growth prospects.

Valuations of fertilizer and agricultural chemicals companies have declined following four years of bumper crops and high stocks, which have reduced farm economics and prices for farm inputs. Potential merger synergies for fertilizer producers include maximizing unit profit across a bigger operating base, optimizing working capital and capital spending, and optimizing logistics. The addition of strong retail operations provides timely market intelligence and ability to optimize working capital throughout the value chain.

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