Agrium (AGU) has confirmed that it is in discussions with Potash Corp (POT) regarding a potential "merger of equals." News reports say a deal could be agreed upon as early as next week. Without the disclosure of merger terms, we're sticking with our current fair value estimates for now--PotashCorp at $20 per share (CAD 26) and Agrium at $96 per share (CAD 125). But we would likely adjust our fair value estimates upward if a deal is agreed upon, based primarily on cost synergies, with less impact from firmer potash pricing.
At first glance, we think the market's positive response (POT up 10% and AGU up 6%) to the deal looks a bit optimistic. In addition to cost synergies, the market is likely baking in improved industry fundamentals from the deal, most likely better potash pricing. For example, potash and phosphate peer Mosaic, a company not part of the proposed deal, is up more than 9% as we write. We think the likelihood of higher potash prices directly related to the deal is limited as Agrium is a second-tier player in the global potash market. Agrium controls roughly 2 million metric tons of the 60 million metric ton market and already co-markets its potash sales outside of North America with PotashCorp and Mosaic.
If the parties agree to a deal, our base case assumption would likely be that regulators would allow the deal to proceed, given fertilizer markets would remain very competitive for the highly commoditized fertilizer products sold by the two companies. On the moat side, we would expect to award the combined company a narrow rating, based on cost advantages in potash for both PotashCorp and Agrium, and Agrium's solid cost position in nitrogen.
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