What's going on?
Two Canada-based fertilizer giants are getting married! Agrium and Potash Corp. are joining forces to create a combined company worth about $36 billion.
What does this mean?
The two are joining forces mainly because they think they can make more money by working together. Potash Corp. focuses on producing potash, nitrogen and phosphate (three of the primary components of fertilizer), while Agrium also sells the fertilizer to farmers. The companies say the merger will be worth about $500 million per year in reduced costs and improved sales (a.k.a. synergies).
Why should I care?
The bigger picture: Farming – and associated industries – is going through a tough time right now.
Relatively low prices for crops such as corn and wheat (both at multi-year lows) have caused farming income to plummet in recent years. The US Department of Agriculture predicts that “net farming income,” the main measure of the farming industry’s economic health, will hit its lowest level since 2009 this year. That decreases demand for farming supplies, including fertilizer, seeds and equipment which, of course, hurts the producers of those products (for example, Potash, Monsanto and John Deere). Consolidating (a.k.a. completing a merger or acquisition) is one way such companies can try to protect their profits.
For the stocks: The news has been taken positively by shareholders.
The companies first announced that they were discussing this deal a few weeks ago. At the time, stocks of both companies rose almost 10%. Investors tend to like it when a company is able to generate a higher profit via consolidation. The question now is whether the deal will face opposition from governments in the US and/or elsewhere due to concerns that the reduced competition in the fertilizer space could lead to higher prices for farmers (political sensitivities have already been heightened by a batch of agreed and potential mergers and acquisitions in the related field of agrobusiness).