• Research

Sep 1, 2016

S3 BLACKLIGHT: Shorts Waiting To See If Potash-Agrium Deal Remains a Merger of Equals

Potash Corp. of Saskatchewan Inc. (POT US) and Agrium Inc. (AGU US) are in talks to merge their companies amid falling fertilizer prices due to oversupply and weak farmer demand. With worldwide potash production hitting 52 million MT in 2015 and demand at only 35.5 million MT consolidation was expected in the fertilizer production sector. With Potash and The Mosaic Company (MOS US) combining for over 45 million MT of capacity themselves, Potash needed to increase both economies of scale and find new distribution outlets. Merging with Agrium would allow the two companies to close less efficient plants, increase production and margins at remaining plants and expand their customer base (Agrium has 17% penetration in the U.S. market).

Unfortunately, since the new industry behemoth would control over 40% of the North American potash, phosphate and nitrogen production capacity the deal will probably become a target of U.S. antitrust regulators. Canada’s Competition Bureau would also have to review the deal, but at least it would not have foreign acquisition objections as it did in Australia’s BHP’s attempt to takeover Potash in 2010. The combined companies will probably have to sell off some of their production capacity in order to quell regulators antitrust fears.

Potash is up $1.86, or 12%, and Agrium is up $6.23, or 7% on the news of the potential merger. Potash has a slightly larger market cap than Agrium, $15.1 billion vs. $13.2 billion, and more than twice the short interest of Agrium, $885 million vs. $438 million. Short selling in Potash has increased by $161 million, or 22%, this past week while short selling in Agrium is up only $20 million, or 5%.

After averaging $376 million last year and starting the year at $269 million, Potash short interest is up 229% in 2016 to $885 million. Potash short interest has been growing steadily throughout the year with balances up $134 million in the 1st quarter, $277 million in the 2nd quarter and $205 so far in the 3rd quarter. The S3 Velocity Indicator, a measure of the real-time change in shorting activity, has been trending upward at a steady rate throughout the year indicating short selling momentum in Potash has had a steady influence on its stock price all year long. Agrium however, after averaging $341 million of short interest in 2015, decreased $77 in the 1st quarter, rose only $28 million in the 2nd quarter but increased $141 million so far in the 3rd quarter. Short selling momentum, as seen in the S3 Velocity Indicator, has ramped up since the beginning of July.

While short interest in both these stocks saw increased activity in the last quarter, we have seen a lull since the potential merger was announced. An increase or decrease in shorting activity over the next week or two will be a good indication of how high the antitrust hurdles are before this deal can be finalized and whether the deal remains a “merger of equals” or a premium would need to be added to one side of the deal.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC     Ihor.Dusaniwsky@S3Partners.net

The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.


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