Potash Corp, Agrium talk merger; competition scrutiny expected

August 30, 2016 10:42 AM EDT

Jochen Tilk, who takes over as Potash Corp's chief executive officer in July, attends the company's annual general meeting in Saskatoon, May 15, 2014. REUTERS/Derek Mortensen (CANADA - Tags: BUSINESS AGRICULTURE) - RTR3PD1I

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By Rod Nickel and Diane Bartz

WINNIPEG, Manitoba/WASHINGTON (Reuters) - Canada's Agrium Inc (NYSE: AGU) and Potash Corp of Saskatchewan Inc (NYSE: POT) said on Tuesday they are in talks to merge, a deal that would create a fertilizer and farm retailing giant worth more than $25 billion but also trigger U.S. regulatory scrutiny.

Potash Corp (NYSE: POT), the world's biggest crop nutrient company by capacity and Agrium (NYSE: AGU), North America's largest farm retailer, said in separate statements that the talks were at a "preliminary" stage about a possible merger of equals, adding that no agreement has been reached.

U.S.-listed shares of Potash and Agrium rocketed up 11 and 7 percent respectively.

The deal would be the latest in a string of agriculture merger attempts, including potential combinations of seed giants Monsanto Co (NYSE: MON) and Bayer AG , and ChemChina [CNNCC.UL] and Syngenta .

Fertilizer companies have suffered lower profits as crop nutrient prices tumbled due to excessive supply and weak demand. Crop prices have also hurt, with corn and wheat at seven-year and 10-year lows respectively, giving farmers less incentive to maximize production with fertilizer.

For Potash, it would be a chance to grow without a foreign takeover, a politically sensitive point in Canada. In 2010, Ottawa blocked a takeover bid for Potash by Anglo-Australian miner BHP Billiton Ltd (NYSE: BHP)(NYSE: BLT), after political opposition from Potash Corp's home province Saskatchewan.

A merger would give Potash a direct channel to U.S. farmers through Agrium's retail stores, which as of May accounted for 17 percent of the U.S. market. Industry watchers said this and other factors would catch the attention of U.S. regulators.

“I can't predict what they (U.S. and Canadian regulators) would do but this one would come under intense scrutiny,” said Bob Taylor, an economist and professor emeritus at Auburn University’s College of Agriculture.

A combined company would be dominant in North America, controlling 62 percent of potash capacity, 30 percent of phosphate production capability and 29 percent of nitrogen capacity, National Bank analyst Greg Colman said.

Diana Moss, president of the American Antitrust Institute non-profit group, said she would be “very surprised” if antitrust regulators approved such a merger.

"This is bad for the American farmer and the American food consumer," she said. “The farmer is in the middle of a squeeze play.”

National Farmers Union will likely oppose the merger since the fertilizer industry is already concentrated, said president Roger Johnson.

“The problem that these mergers create is that it's probably the same industry supplier that is supplying the local cooperative as well as the distributor 50 miles down the road.”


U.S. farmers are among the world's biggest users of potash. Antitrust concerns there could be addressed by the combined company selling at least one potash mine, brokerage Stifel said in a note.

While there would be no concerns this time about a foreign takeover, Canada's Competition Bureau still would review the deal.

Saskatchewan Premier Brad Wall said the two companies' chief executive officers phoned on Tuesday to alert him to the talks.

Wall, a key voice against BHP's bid, told reporters that a merger may mean opportunities for his province since Agrium is based in Calgary, Alberta.

The companies are similar in market capitalization, but Agrium has weathered the commodity slump better than Potash, due to its balance of fertilizer production and retail sales.

"(A merger) will make them a better force to compete on a global scale," said Mohsin Bashir, portfolio manager at Stone Asset Management Ltd, which owns Agrium shares.

A combination looks like a good fit for Potash Corp, and is preferable to a foreign takeover, said Ryan Bushell, portfolio manager at Leon Frazer & Associates, which owns Potash shares.

"It does make sense from a strategic perspective," he said.

Shares of Potash Corp, which had a market valuation of C$17.54 billion ($13.43 billion) as of Monday's close, were up 10.7 percent at $17.76 in New York.

Agrium, worth C$16.10 billion, was up 7.9 percent in Toronto at C$125.76.

The talks were first reported by Bloomberg.

($1 = 1.3064 Canadian dollars)

(Additional reporting by Greg Roumeliotis in New York, Ankur Banerjee in Bengaluru and John Tilak in Toronto; Editing by Saumyadeb Chakrabarty and Marguerita Choy)

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