Will a Merger of Equals Be Enough for Potash Corp. or Agrium?

When investors hear the term “merger speculation,” they usually tend to get excited. These often mean huge premiums for the company being acquired. But in a “merger of equals,” that premium is not really found in the immediate gratification from a buyout. What needs to be considered here is that mergers in this space were rumored years ago, and now they may arrive — potentially without much cheer.

Potash Corp. of Saskatchewan Inc. (NYSE: POT) and Agrium Inc. (NYSE: AGU) have confirmed via a press release what Bloomberg was initially reporting. The companies are in preliminary discussions regarding a merger. The problem here is that the companies said that this would be a merger of equals.

Their statements were identical:

• Potash Corp.: No decision has been made as to whether to proceed with such a combination, no agreement has been reached, and there can be no assurance that any transaction will result from these discussions.
• Agrium: No decision has been made as to whether to proceed with such a combination, no agreement has been reached, and there can be no assurance that any transaction will result from these discussions.

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A merger of equals does not mean that investors will not value the combined companies higher when they are united. After all, companies often have much larger scale when combined, and they often can trim out serious overlaps in operating costs from their general and administrative costs.

Potash Corp. shares were up 13.4% at $18.20 as of the last halt, and its 52-week trading range is $14.64 to $26.06. The consensus analyst price target is $15.84. Agrium shares were last seen up 7.9% at $96.56, and its 52-week range is $79.94 to $105.60, with a consensus price target of $96.43.

Note that both stocks were above their consensus analyst price targets. Agrium’s market cap was $13.3 billion, and Potash Corp.’s market cap was last seen at $15.3 billion.

Agrium’s revenue was $14.795 billion, with an operating profit of $1.616 billion in 2015. It produces and sells crop nutrients, crop protection products, seeds and merchandise in two segments: Retail and Wholesale.

That compares to $6.279 billion in revenue and $1.913 billion in operating income for Potash Corp., which produces and sells fertilizers and related industrial and feed products in three segments: Potash, Nitrogen and Phosphate.

We have to wait and see whether the merger will bring tremendous savings. That being said, the agriculture boom days were in years past, and merger rumors back them seemed much more exciting than this would-be merger of equals. Stay tuned.

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