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Potash, Agrium to combine and create new fertilizer company

Potash, Agrium to combine and create new fertilizer company

Canada's Agrium Inc and Potash Corp of Saskatchewan Inc agreed to combine in a deal that would create a fertilizer giant with an enterprise value of about $36 billion but also draw scrutiny from USA regulators. (NYSE:POT) [Trend Analysis] shows fluctuation in active trade, on Tuesday shares jumped down -1.24% to $16.76. Meanwhile, Agrium shareholders would receive the remaining 48% stake, receiving 2.23 shares in the new company for each share of Agrium.

The deal would bring together Saskatoon-based PotashCorp's fertilizer mining operations - the world's largest by capacity - with Calgary-based Agrium's extensive global direct-to-farmer retail network.

A multi-billion-dollar merger between Potash Corp. of Saskatchewan Inc. and Agrium Inc. could have significant benefits over the long run, but won't insulate the new firm from an extremely weak fertilizer market, according to an industry expert.

The deal comes during a depressed period for fertilizer markets - potash prices have sunk from the heights of nearly US$900 per tonne in 2008 to below $300 this year - while layoffs and merger talk have hit the sector as it grapples with oversupply.

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Potash's Chief Executive Jochen Tilk will be executive chairman of the combined company and Agrium's chief, Chuck Magro, will be CEO. Agrium is also a retail agricultural fertilizer marketer, while Potash Corp.is not in the retail fertilizer business. Both companies expect to retain their current dividend payments until the transaction closure. And that is before potential synergies of US$500 million annually are realized among all the operations. On a 2015 pro forma basis, the new company would have had net revenue of about US$20.6 billion and EBITDA of US$4.7 billion before synergies.

While Agrium CEO Chuck Magro said the transformational merger will create benefits and growth opportunities that neither could achieve on their own, it is important to note that Magro will head the new entity and that one more board member of the new entity will come from Agrium ranks. There's also no guarantee the two cultures will meld as easily as the deal terms suggest, although it helps that both companies are based in Canada. How the merger will affect operations in Northern Colorado has not been divulged by the companies. "Our workforce and the communities in which we operate are critical to both PotashCorp and Agrium, and we intend to carry forward best practices from both companies in corporate social responsibility, including commitments to employees, operating communities and the environment". And the fact that shares of both companies declined slightly upon the announcement suggests that investors don't yet see the advantages of the merger. Exclusive of synergies and using the announced share exchange ratio, our Potash Corp. fair value estimate would fall by about 10% and our Agrium fair value would rise by a similar percentage.

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Stikeman Elliott LLP and Jones Day are serving as legal advisers to Potash Corp. Morgan Stanley & Co.is serving as joint financial adviser to Agrium and Potash.

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