(Bloomberg) -- Over the last three years, Potash Corp., Canada’s giant fertilizer producer, has scrapped two blockbuster deals proposed by two different leaders. Now Jochen Tilk is circling a third with Agrium Inc.
The question analysts are asking is: why?
"You can come up with a rationale if you try hard enough, but it’s still kind of puzzling," said Neil Fleishman, head of research at Green Markets, a unit of Bloomberg BNA. "It seems like a move just to make a move."
Potash Corp. of Saskatchewan Inc. and Agrium, based in Calgary, said last month they’re in talks to merge one of the world’s largest producers of potash, a commonly used fertilizer for hundreds of years, with a farm supply retailer. If they agree, the deal would be substantial: Potash Corp. was valued at $14.8 billion as of the end of trading Tuesday, while Agrium sat at $13.3 billion.
Such an agreement would allow Potash Corp. to diversify its mining business with Agrium’s 1,400 retail outlets across seven countries. Yet it may do little to reverse a 34 percent decline in potash prices over the past year, sparked by oversupply, the crumbling of a global export system that had supported prices for decades, and tepid demand from places such as China.
"This isn’t a blockbuster deal that would make potash prices soar overnight," Fleishman said by telephone.
The 52-year-old, German-born Tilk took the chief executive officer’s job in July 2014, a year after his predecessor, industry icon Bill Doyle, also failed to pull off a deal, at that point with Israel Chemicals Ltd. Doyle left after overseeing a 12-year, $8.2 billion expansion, leaving a dilemma for Tilk as prices for his eponymous product slid, pulling his company’s stock down as well.
Since the day Tilk became CEO, the shares dove 44 percent as of the close of trading on Tuesday. And this year, for the first time in 26 years, the company was forced to cut its dividend in response.
Potash Corp. declined to comment beyond its statement last month. Agrium didn’t immediately respond to questions.
Scotiabank analyst Ben Isaacson, in looking at one potential gain from a Potash-Agrium deal, calculates potential savings of $300 million, but called that number "a bit of a stretch." Steve Hansen, an analyst with Raymond James, estimated savings at $250 million to $500 million though he admits he’s still "a little perplexed" by the proposal.
While the companies say they’re exploring a "merger of equals," Potash Corp. will probably have to pay a premium to close the deal, according to Scotiabank’s Isaacson.
The most likely reason for a merger may have little to do with current prices or even savings, according to Andrew Wong, an analyst at RBC Capital Markets. It might be simply to boost Potash Corp.’s market share and sales through Agrium’s retail operation at a time when Russia-based Uralkali PJSC, Potash Corp’s leading rival, is benefiting from cheaper currencies and is bringing lower-cost mines into production.
Potash Corp. doesn’t sell directly to farmers. It delivers mainly to wholesalers buying on the spot market, according to its website. Agrium’s profile is a mirror image, with 77 percent of its sales coming from its retail operation.
Adding to analyst confusion is uncertainty over which company initiated the talks and what Agrium may stand to gain.
While Agrium does some mining, most of its revenue last year came from global retail sales of fertilizers and seeds, a steadier source of cash flow that has pleased investors. Merging with Potash Corp. would subject it to the more cyclical turns of a mining company.
Potash’s Tilk "may be seeing that the potash industry will languish for longer," according to John Goldsmith, the deputy head of equities at Montrusco Bolton Investments in Toronto, which manages about C$6 billion ($4.7 billion).
"You’ve latched your ride onto a commodity that looks like it’s going to be in quasi-perpetual oversupply," Goldsmith said. “The question is how can you diversify away from that without going into a completely different, unrelated industry? I’d say it’s in the retail side."
Tilk is no stranger to failed mergers and acquisitions. When he ran Inmet Mining Corp. in 2011, he tried and failed to acquire Lundin Mining Corp., an effort that was aimed at creating a Canadian-based copper giant. When Tilk came to Potash Corp. as CEO, one of his first moves was an $8.8 billion push to acquire rival K+S AG. He withdrew the proposal last year as prices plunged for his product and his target insisted on a higher offer.
He may have better luck with Agrium, as the combination is unlikely to face hurdles from hostile targets and foreign governments that had derailed previous attempts, according to Montrusco Bolton’s Goldsmith.
“Winning an acquisition is sometimes the winner’s curse," Goldsmith said, but the proposed Agrium merger is probably "the least controversial" considered by the company so far.
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