In this "merger of equals," we would expect to award the combined company a narrow moat, based on cost advantages in potash for both companies and Agrium's solid cost position in nitrogen.
Following reports a couple of weeks ago that Agrium
and Potash Corp
were considering a merger, the companies announced a "merger of equals" on Monday, potentially creating the world's largest crop nutrient company.
Jeffrey Stafford, CFA, is director of energy and utilities research for Morningstar.
Given our stand-alone company fair values--$20 per share for Potash Corp. and $96 per share for Agrium--the deal terms (52% ownership of the combined company by Potash Corp shareholders) favor Agrium shareholders, in our view. Exclusive of synergies and using the announced share exchange ratio, our Potash Corp. fair value estimate would fall by about 10% and our Agrium fair value would rise by a similar percentage. This is a function of our belief that Potash Corp. is more undervalued than Agrium. Including our estimate of cost synergies, our Potash Corp. fair value estimate remains $20 per share (CAD 26) and our Agrium fair value estimate jumps to $114 per share (CAD 149). We don't think the merger will do much at all to affect fertilizer pricing and our long-term pricing assumptions are unchanged.
We think management's synergy target will prove optimistic. The company hopes to achieve an annual run rate of $500 million in operating synergies two years after the deal closes (expected for mid-2017). Although we think opportunities in selling, general and administrative costs are ripe for cutting, procurement targets, for example, could be harder to achieve. In general, we think it's best to take merger management synergy targets with a grain a salt, given enthusiastic targets are difficult to verify ex-post. We include a run rate of roughly $350 million in annual cost cuts in our model.
We think antitrust regulators will allow the deal to proceed, given fertilizer markets would remain competitive with Agrium controlling less than 3% of global potash capacity. We would expect to award the combined company a narrow moat, based on cost advantages in potash for both Potash Corp. and Agrium, and Agrium's solid cost position in nitrogen.
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