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Potash, Agrium merger probably wouldn’t lead to big job cuts

PotashCorp sees prices shrink due to weak market

Fertilizer may not be the sexiest of topics, but a potential $30 billion merger can sure get pulses racing. That was the way it played out on the stock market about a week ago after Canadian fertilizer giants Potash Corp of Saskatchewan and Agrium Inc confirmed they were in talks for a megadeal that would create by far the largest potash producer in the world.

Shares of both companies soared on the news, with shareholders hoping the new behemoth would be able to successfully navigate an industry struggling with low prices and a global glut of potash, a key ingredient in fertilizer.

But megadeals always leave turbulence, and this one – if it actually happens – would be no exception, though maybe not as much as some people think.

While there are no real details to chew on – the companies have so far just confirmed they’re in talks – the combination would marry Potash Corp’s fertilizer production with Agrium’s own production, as well at its farm supply business.

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The result would be a company far and away the global leader in potash, controlling nearly a quarter of the global market, as well about half of North American production. Adding Agrium’s retail arm to Potash Corp’s production would also cut costs by providing a more direct route from mine to crop.

But mergers are never as simple as mashing two companies together and changing the letterhead.

To start with, true ‘mergers of equals’ are rare. Usually one company ends up in the drivers’ seat. But it’s unclear at this point which one it would be.

Potash Corp is worth a bit more (valued around $15 billion to Agrium’s $13 billion), but Agrium has higher revenue, due to the damage done to Potash Corp’s bottom line by falling fertilizer prices.

Cost savings are always a goal in a merger, and analysts estimate anywhere from $150-$500 million in ‘synergies’ that could be wrung from the deal, much of it likely to do with head office job cuts.

“You don’t need two finance departments, you don’t need two investor relations, or two HR departments. It’s your normal kind of M&A synergies,” says Colin Isaac, an analyst at London-based Atlantic Equities.

But while some fear a merger could result in lower production and job cuts at some of the entity’s higher-cost mines, Isaac expects cuts to be limited, noting both companies have been through several rounds of cost cutting over the last few years.

“The fixed costs of the companies are fairly low,” he says.

Then of course, there are regulatory issues to think about, particularly when an already leading player takes an even bigger slice of an industry. Potash Corp was nearly acquired by Australian miner BHP Billiton in 2010 before the Canadian government stepped into kill the deal, so its been there before.

But as both companies this time around are Canadian, the federal government shouldn’t’ be an issue, and analysts think antitrust issues likely won’t be a major hurdle, since Agrium’s dominance is more on the retail side than potash production.

If anything, the deal talk may signify that both companies feel the industry is poised for a rebound, says Dan Sherman, a St. Louis-based analyst at Edward Jones.

“I think one of the reason this merger’s happening is that both companies believe that potash prices have bottomed,” he says.

“I think it’s going to be easier than a lot of mergers that have been proposed in the past.”