Market Overly Optimistic About PotashCorp/Agrium Merger

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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