A Day Of Pride For Agrium (AGU) & A Day Of Shame For Potash Corp (POT) by Global Slant

Agrium Has All Of The Negotiating Leverage In Potential Deal With Potash Corp.

The all too frequent miscues and misfires of Potash Corp’s [POT] executive ranks, since 2008, have come into focus today with the disclosure of a potential “merger of equals” with Agrium [AGU].

The equity values may equate at $12B [prior to the leaked deal talks earlier today] but management’s acumen has been anything but equal as AGU’s bifurcated strategy of retail + wholesale has proven far superior to POT’s patient, and ineffective, commercial approach.

It is clear, from the monthly price chart below, that AGU has weathered this miserable agricultural nutrient market with a much better company plan and executed strategy [especially since 2012].

better pot chartSo much so that its equity currency has much greater relative value than POT’s. And with a stronger currency comes all of the negotiating leverage. This deal ONLY happens if AGU wishes for it to happen. POT shareholders, after years of misery, will only receive the crumbs they are allocated from AGU’s Board of Directors.

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Furthermore, I am not so sure why AGU would wish to acquire POT…other than trying to acquire assets near a potential market trough…which makes some sense…especially as they expand their retail market in the U.S. And it is important to note that both companies traffic in the Big 3 agricultural nutrients.

But just because the NP&K markets may be bottoming does not mean they are primed to move straight up. There is still so much excess capacity to absorb…particularly in N [nitrogen] over the next 18 months…and K [potash] is still well supplied. P[Phosphate] pricing is not as downtrodden as the other two markets but still very soft. Since peaking in 2008/2009 prices for all three nutrients have severely, and consistently, moved “down and to the right.”

And please be reminded that agricultural nutrient market pricing is primarily driven by agricultural product pricing. In the U.S. and Canada that is primarily corn, wheat and soybeans [all of which have tanked in recent years] while overseas demand for nutrients has been anything but starched as the strong dollar both weakens purchasing power for imported nutrients + increases the incentive to maximize overseas product volume shipped [since most transactions are conducted in $US].

And, although not regularly reported, China [the source of so much potash demand in the first decade of the 2000’s] is also developing their own mines.

Add to that India’s large demand/import cutbacks + Uralkali/Belaruskali’s business strategy of maximizing supply versus price [which has proven to be much more successful than anticipated] resulted in a miserably priced market for potash.  It is just “a mess”…the kind of a “mess” that could indicate a market bottom.

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Still POT’s many mis-steps, since those heady days of 2008, have been self-inflicted…leading to their current conundrum under ineffective CEO Jochen Tilk and his blunt/optimistic predecessor Bill Doyle.

Despite insisting to the contrary Tilk has twice cut the dividend in just the past twelve months …while maintaining a steadfast belief [like his predecessor] that a pricing rebound is nigh. His credibility is “shot”…and AGU is well aware of it…hence the corporate pursuit.

POT, under Doyle, also rebuffed Australia’s BHP size-able offer for the company in the summer of 2010 [see above price chart]. In retrospect POT’s Board of Director’s [under political pressure from the province of Saskatchewan] made a HUGE economic mistake to reject the substantial $39B BHP offer [225% higher than POT’s value earlier today prior to the Bloomberg chatter that a deal with AGU might occur].

Since then the global fertilizer sector has been in the tank and POT, despite it’s stellar mines and operating proficiency, has also suffered.

And not happy with being rejected BHP has [unfortunately for their shareholders] squandered over $2B preparing the massive Jansen mine…also located in Saskatchewan [solely capable of increasing global production by a staggering 15%]…though it is likely to be shelved.

Earnings and cash flow for POT have naturally lagged and the balance sheet has weakened. In the meantime POT’s equity interests in other global nutrient providers [Israeli Chemicals, Arab Potash and Sociedad Quimica Minera] curiously remain “un-monetized”…and surely could have buffered their deteriorating financial operating metrics. An unsuccessful bid for Israeli Chemicals was yet another failure.

And, of course, Tilk could not even succeed in over-paying for K+S of Germany. POT’s strategy of attempting to acquire an entire company in order to gain control of a pivotal potash mine [Legacy] in their Canadian backyard was lucky to fail. The price offered was much too rich and the German company was unwise to reject it.

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Now the hunter[POT] is being hunted as Calgary based AGU is in the proverbial drivers seat [thanks to a successful “stiff arm” to Barry Rosenstein’s aggressive activist fund JANA Partners’…and his now obviously flawed idea to split AGU’s wholesale + retail divisions in 2012/2013].

Former AGU CEO Mike Wilson’s forceful efforts to repel JANA must be applauded as the retail division has offset substantial weaknesses [but still profitable] at the wholesale division.

So do not be fooled that this POTENTIAL combination = A MERGER OF EQUALS. It surely is not…despite the PR spin and headline mathematics. AGU is clearly on the hunt for very vulnerable corporate prey.