Agrium and Potash Corp.’s megamerger spells confusion

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Ignore the tantalizing $36-billion (U.S.) deal size. Agrium Corp.'s merger with Potash Corp. of Saskatchewan Inc. boils down to two crucial questions: Why these companies, and why now?

For Potash Corp., the answers are simple. The market for its main commodity is in rough shape. Potash prices have fallen by more than half since early 2012. Diversifying profits by adding Agrium's desirable retail business should smooth earnings. Whether that's worth accepting no merger premium is up to shareholders, but at least the strategy is clear.

But what's in it for Agrium?

On a conference call and in an interview Monday, Agrium chief executive officer Chuck Magro justified the deal by stressing the benefits of creating a Canadian champion and the power of stripping $500-million in annual costs out of the combined businesses. Yet most of his explanations were vague, prompting analysts to keep asking various versions of the same question: How exactly will the merged company achieve such large synergies?

Agrium and Potash promise that widespread job cuts aren't on the table – which makes sense, because they have to appease provincial governments. Beyond that, the executives talked about shortening the travel distance when delivering commodities and spoke of reducing the storage time for their products. Mr. Magro also mentioned Potash has phosphate rock that can be used to feed Agrium's processing plants, which should boost margins. No figures were provided, however.

It was surprising that the companies gave so few specifics. Analysts are already saying that they're puzzled by the deal, because it just doesn't seem possible to get to $500-million in annual savings. Mr. Magro referred to those savings as the "the beauty about this transaction," because they can be delivered no matter what happens to potash prices. Given all of that, you'd think the two CEOs would have gone to the trouble to come up with with a few concrete examples.

Then there's Mr. Magro's change of heart, which was rarely referenced. At an investor day in June, he made it clear that he loves running a diversified business anchored by the retail operation, and he wasn't willing to chase wholesale fertilizer producers like Potash Corp. because they were still too expensive in a bad market.

Before the proposed merger, Agrium generated nearly half of its EBITDA from a retail division that sells nutrients such as potash, nitrogen and phosphate to farmers. (EBITDA is earnings before interest, taxes, depreciation and amortization.) Mr. Magro has long believed this arm helps boost the company's value, because its profits are "sticky" compared with those of pure-play commodity producers. "Certainly in these volatile times, we have proven that the business model is more stable and resilient than many others," he said, without naming names.

If the proposed deal with Potash Corp. is approved, the merged company's retail unit will generate about 20 per cent of EBITDA. As for buying a wholesale producer, only three months ago Mr. Magro said he was more focused on retail acquisitions. He did leave some wiggle room, but added that Agrium had evaluated a lot of deals and "we've passed on everything on the wholesale side, because either it wasn't a strategic fit, it didn't meet our hurdle rates, or we had better uses of the capital."

So what changed? We don't really know. But all signs point to price. Agrium is getting Potash Corp. – a company for which BHP Billiton Ltd. famously bid nearly $40-billion before Ottawa shooed them away – for no takeover premium. Mr. Magro can't advertise this too loudly, because it doesn't look great for Potash investors, who have seen their shares lose one-third of their value in the last year alone.

What shareholders got instead were vague promises. Maybe they'll prove to be true. But if you were scoring Mr. Magro's first try in selling this deal, you'd have to say he swung and missed.