Citi Gives Their Take On Potential Potash-Agrium Tie-Up

Potash Corporation of Saskatchewan (USA) POT confirmed that it is in the midst of merger talks with Agrium Inc. (USA) AGU. Among all the fertilizer companies, the Potash-Agrium merger “makes most sense to us,” Citi’s P.J. Juvekar said in a report. He maintained a Neutral rating on Potash, with a price target of $17.

Why The Combination Makes Sense

The announcement of the combination initially came as a surprise, but now seems to make sense, analyst Juvekar mentioned. Potash is among the largest players in the potash market, with a global market share of ~17 percent. On the other hand, Agrium has a share of merely ~2 percent.

“The synergies would come from utilizing AGU’s retail channel to push more of all three nutrients (nitrogen, phosphate and potash). AGU is already deploying that strategy on its own and has been able to repatriate ~600kt of sales through its distribution network, resulting in ~$50/mt of higher margins,” Juvekar wrote.

While Potash plans to add potash capacity of 2.4 million tons to its Rocanville mine in 2017, Agrium has recently added 1 million tons of capacity to its Vanscoy mine. “There could be some synergies in running these 2 mines under one roof, in addition to the typical elimination of duplicate functions within the 2 companies,” the Citi report noted.

Agrium is a large player in the nitrogen market, with ~3.6 million tons of capacity and has a strong presence in Western Canada. Potash is mostly present in the US and Trinidad. “AGU’s Canadian nitrogen business is very profitable, given its access to cheaper gas (~$1/mmbtu cheaper than the USGC), and higher local prices in western Canada,” the analyst stated.

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