While the merger between Agrium Inc. (TSX:AGU)(NYSE:AGU) and Potash Corporation of Saskatchewan Inc. (TSX:POT)(NYSE:POT) won’t formally close until mid-2017 (at which point a name will be selected), a recent investor presentation finally settled all of the key details about the deal, giving investors and analysts everything they need to gauge its merits.
To begin, the deal will truly be a “merger of equals” as the companies hinted at in an early press release. What does this mean? Quite simply, neither Agrium nor Potash Corp. will need to pay any premium (there was speculation Potash Corp. would need to pay a hefty premium to acquire Agrium given that it is trading at a lower multiple than Potash Corp. and has valuable retail assets).
Agrium shareholders will receive 2.23 shares in the new company for each Agrium share, and Potash Corp. will receive 0.4 shares in the new company for each Potash Corp. share. The new company will have some impressive statistics; with 19 million tonnes of potash capacity (and three million tonnes coming online), it will be the largest producer and the third-largest nitrogen producer globally.
There were a few key takeaways from the investor presentation. First, Agrium and Potash Corp. estimate that combined, they could realize $500 million in annual synergies. This is one of the key strategic rationales for the merger. Second, Potash Corp. shareholders will most likely see a dividend bump (whereas Agrium shareholders will see their dividend unchanged).
$500 million in synergies expected
This is probably the most significant part of the deal. Where will these synergies come from? A sum of $150 million will come from optimizing the distribution network and integrating Agrium’s retail network with Potash Corp.’s wholesale operations. Agrium’s retail footprint in the Corn Belt overlaps well with Potash Corp.’s production facilities, and by supplying Agrium’s retail locations with Potash Corp.’s product, there is a huge opportunity to reduce freight and logistics costs.
Another $125 million is expected to come from SG&A, which basically refers to reducing overhead. For example, only one headquarters will be required, and major administrative positions will be consolidated. The company then expects to save an additional $125 million from optimizing wholesale production.
It will also save $100 million from procurement and capital efficiencies, which could mean cost reductions from the company’s larger scale as well as reductions that could come from the ability to deploy capital more efficiently due to a larger asset base.
It is important to remember that these synergies will be on top of the cost-cutting programs currently being executed by both Agrium and Potash Corp. Management is very confident in the forecast for synergies due to a review process which lasted several months; they expect 50% of the synergies to be achieved in the first full year after closing.
Agrium will fund a dividend boost for Potash Corp. shareholders
Another aspect of the deal that is of great detriment to Agrium shareholders is that Potash Corp. shareholders will see a dividend boost. The new company is estimated to have a dividend of $1.57 per share, or about $1 billion in total (assuming the new company has 624 million shares, which is what it would have given the share exchange ratios mentioned earlier). This compares to the current combined dividend between Agrium and Potash Corp. of about $820 million.
This means that the new company will have a dividend that is about $180 million higher–funded by Agrium. Agrium expects to have 308 million shares in the new company (of the total 624). At a dividend of $1.57 per share, that equals $484 million, which is equal to their current dividend. Potash Corp., however, with 334 million shares in the new company, would see a total dividend of $524 million, which is higher than its current dividend of $334 million.
This means Potash Corp. shareholders are getting a dividend boost from Agrium’s cash flow.