A smaller but better fertilizer deal?

08/25/2010 1:30 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

It doesn’t have the splash of BHP Billiton’s (BHP) $40 billion bid for Potash of Saskatchewan (POT), but Agrium (AGU)’s attempt to snatch AWB, Australia’s largest wheat exporter away from GrainCorp (GRCLF) is actually a more important deal for the acquirer.

It looks like Agrium will succeed in succeed breaking up the GrainCorp/AWB deal, since the AWB board has voted to accept Agrium’s offer over that of GrainCorp and most analysts don’t think GrainCorp will come back with a higher bid. I think the acquisition will push Agrium to a new level in the fertilizer markets of Asia. This isn’t simply an effort to deploy some company cash but a strategic move that will open up big new markets for the company.

Agrium has offered $1.1 billion in cash for AWB. That tops GrainCorp’s offer of $980 million in stock.

Canada’s Agrium, North America’s third-largest fertilizer producer by market value, would gain a platform for expanding sales of fertilizers and herbicides into Australia, the world’s fourth largest wheat exporter. But more importantly it would give Agrium a boost in its expansion into Asia. The big prize is China, the world’s largest market for fertilizer. Agrium owns almost 20% of the shares of Chinese fertilizer producer Hanfeng Evergreen, a leading Chinese producer of controlled-release fertilizers

Agrium is a different kind of fertilizer company. Yes, it’s a wholesaler of fertilizers, a business where its cheap sources of natural gas in Canada and South American give it a competitive cost advantage over other producers. (Natural gas accounts for 60% to 80% of the total cash cost of producing nitrogen for nitrogen fertilizers.) This is a key consideration because natural gas constitutes 60%-80% of the total cash cost of nitrogen production. As a potash producer Agrium is substantially smaller than Potash or Mosaic (MOS), but it has roughly 2 million metric tons of annual potash production capacity.

But the company has also built North America's largest retail distribution system for agricultural products ranging from fertilizers to herbicide to seed. The retail unit accounts for roughly two-thirds of the company’s total sales.

Duplicating something like that network in Asia, by giving customers the ability to buy fertilizer, pesticides, seeds, and more at a single outlet, would give Agrium a leg up over fertilizer wholesalers who rely on third parties to sell to farmers. Agrium would move closer to the end user, gaining experience in how to offer the bet product mix for specific local markets with their different mixes of weather, geography, and crops.

The company has completed nine acquisitions in the past five years. In March Agrium withdrew a $5.4 failed bid for fertilizer maker CF Industries Holdings (CF). With this post I’m adding Agrium to Jim’s Watch List.

Full disclosure: I don’t own shares of any company mentioned in this post in my personal account.

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