Agrium Wants Expedient Merger - Analyst Blog

Agrium Inc. (AGU) and AWB Ltd. have signed a definite agreement with respect to the merger proposed on Aug 15, 2010. AWB accepted Agrium's A$1.24 billion (US $1.19 billion) acquisition offer discarding Australian grain maker, GrainCorp Limited's all-stock proposal of A$885 million ($850 million). Agrium's all-cash $1.50 ($1.44)  per share, represents a 57% premium over AWB's trading price of A$0.955 ($0.92) as of July 29, 2010, is indeed superior to GrainCorp's no premium offer of A$1.047 ($1.00).

AWB will provide a three days notice to GrainCorp, pulling out from the initially signed AWB-GrainCorp agreement after which AWB will recommend the Agrium transaction to its shareholders.

Expanding the Retail Wing

AWB Limited is Australia's largest agribusiness and one of the world's largest wheat marketing and management companies. With the acquisition, Canada-based fertilizer company, Agrium would venture into the retail Australian market. 

Agrium expects to benefit from AWB's retail Landmark Rural Services division that would boost revenues going forward. Agrium's Retail business forms over 50% of its total revenue. The company sells crop nutrients, crop protection products and seed, services & other products directly to farmers under the segment. Crop Nutrients (58% of Retail sales in 2009) include a range of products such as nitrogen, phosphate, potash, sulfur and micronutrients in either liquid or dry form. Crop protection products (32% of retail sales) comprise herbicides, insecticides and fungicides. Seed, Services & Other Products (10% of retail sales) contain a complete range of crop seeds as well as liquid and dry fertilizers.

Agrium focuses on a strategy of growth that includes a combination of acquisitions and organic development efforts. The company has completed as many as nine acquisitions in the last four years. It has expanded its Retail operations with the acquisition of 22 retail centers from Archer Daniels Midland in the southern U.S. for $13 million. Agrium also acquired 26% of a 675,000-ton urea facility of the MISR Oil Processing Company in Egypt. In its Advanced Technologies business, the company expanded into China by purchasing a 19.6% stake in fertilizer company Hanfeng Evergreen for $63 million.

Industry Scenario

The fertilizer industry is in a consolidation phase. The AGU-AWB agreement has come up just after the Potash Corporation of Saskatchewan Inc. (POT), the world's largest fertilizer company by capacity, rebuffed mining giant BHP Billiton Ltd's (BHP) hostile acquisition proposal of $38.6 billion (all in cash) citing that the offer grossly undervalues the company and its future growth prospects. Prior to this, we saw the year-long takeover battle between Agrium and two other North American fertilizer companies including CF Industries (CF) and Terra Industries (TRA) ending with CF acquiring Terra.

Currently, Agrium is a short-term (1 to 3 months) Zacks #3 Rank ("Hold"). We maintain our long-term Neutral recommendation on the stock.

 
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