As we wrote two weeks ago in AGU+POT | Farm Misery and Anti-Trust Hurdles , the logical expectation in our eyes was not a true merger of equals. Judging by the market’s reaction to this morning’s news, consensus was also thrown off by the headlines. Below we offer three important points to consider as we learn more about the planned merger over the coming months:
- End Markets and pending results in retail are potentially weaker than expected
It’s possible that Agrium was willing to do a modestly dilutive deal to change the story, or at least distract investors with the hopes that more a more favorable environment is on the horizon. While the merger announcement may create a bit of a distraction to a worsening industry downturn, stress on North American Ag. is increasingly severe. Both companies are looking at margin pressure into 2017 just based on current crop prices and grower input costs.
- We believe in the identified synergies but are curious to see what unfolds from an antitrust standpoint
We expect the final terms to vary from expectations to accommodate regulatory concerns. Alternatively, we see a low chance of consummation, and therefore are less concerned with favorable terms. Specifically, the combined entity’s pending control of North American distribution channels will likely raise some red flags for regulators - AGU’s retail segment complicates the merger review process. If regulators view distribution as a price + margin business, there would be limited incentive for Agrium to pressure the market with lower prices – If anything they may be incentivized and able to permit higher prices.
On the wholesale side, regulators may view Canpotex as evidence of previous collusion, viewing the added concentration as a sign that a combined entity would have a stranglehold on North American potash markets.
- A merger of equals suggests AGU was willing to pay up for wholesale assets, which is somewhat of a shift away from AGU's retail identity.
Based on financial performance the last several years, the perceived stability of AGU’s retail margins on a go-forward basis have been treated very favorably by the market. So the question we would ask is why didn’t the “crown jewel” contribute to deserving a premium in a merger with the much more concentrated and financially stressed business of POT unless there are some cracks in the outlook for the retail segment? The exchange ratio with Potash Corp. shareholder’s receiving 52% of the combined entity implied a per share value for Agrium under $90/share, where it was trading before the announcement. The merger is a divergence in the North American retail strategy that has been discussed in recent management commentary, and if nothing else we would ask if there was a shift in the perceived outlook and opportunity in persuing this strategy.
