Billion-dollar buy

Abstract:

The Canadian fertilizer firm Potash Corp intends to buy the phosphate concern Texasgulf Inc for more than $1 billion. Potash, which already occupies a strong position in China, hopes to become a diversified, global supplier of agricultural products through the acquisition.

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Potash is a hot commodity in China. Transport trucks carrying the fertilizer have been hijacked, and one man was reportedly even killed in a brawl over potash a few years ago. The Canadian potash industry can take credit for creating some of that vociferous demand: it has run a grassroots marketing campaign in China for more than a decade. Among other initiatives, the industry has operated field trials in which agronomists grow crops on small test plots to demonstrate the benefits of using potash. It also sponsored what was by local standards a lively television advertising campaign, featuring Mark Rowswell, an Ottawa-born comic who is popular in China. Charles Childers, chairman and chief executive officer of the Potash Corp. of Saskatchewan, says that the marketing has been so good that even the distinctive salmon-pink color of Saskatchewan’s potash has become an advantage. “In China, red is a lucky color,” said Childers in his American Midwest drawl. “The Chinese refer to our potash as the `magic pink powder.’ ”

But Potash Corp. has much more than marketing on its mind. Last week, the company–the largest potash producer in the world–announced that it would spend $1.1 billion to acquire Texasgulf Inc. of Raleigh, N.C. Texasgulf is a low-cost producer of phosphate, which along with nitrogen and potash are the three key agricultural fertilizers. Coincidently, China already has large domestic supplies of nitrogen. Potash Corp., which produced 14 per cent of the world’s potash last year and currently estimates that it has 200 years of potash reserves under the ground in Saskatchewan, had been shopping for an acquisition. Childers, who worked for IMC Global of Northbrook, Ill., a large phosphate and potash producer before he came to Potash Corp. in 1987, says that he has “coveted” Texasgulf for years.

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Such expensive acquisitions are often detrimental to shareholders’ interests because they can divert profits away from dividend payments. But in this case, the stock market reacted favorably. Potash Corp.’s share price jumped by $8 to close the week at $58. Raymond Goldie, a mining analyst with Richardson Greenshields of Canada Ltd., says that the acquisition will broaden the company’s existing business and will increase its short-term profits.

In fact, Goldie likens the resource potential of Saskatchewan’s potash industry to that of the aluminum industry. “Around the turn of the century, a group of people realized that one of Canada’s prime assets was the hydroelectric power potential of Quebec, and they capitalized on that by building aluminum smelters,” said Goldie. By comparison, the massive potash deposit, which runs in a 200-km-wide belt across south-central Saskatchewan for 500 km–and is estimated to contain reserves of 50 billion tons–may be the most valuable single mineral deposit ever found in Canada. “I can’t think of any other ore deposit in Canada that will provide such a long-term benefit to the country,” he said. “And Potash Corp. represents the economic exploitation of that resource in the same way that Alcan exploits Quebec’s hydro potential.”

Potash Corp. began its life as a Crown corporation in 1975 with the mandate to develop the massive ore deposits. A year before the company was privatized in 1989, its operating strategy changed. “Instead of producing potash as fast as possible to maximize the number of jobs for the people of Saskatchewan, the approach they took was to restrict output to meet demand,” said Goldie. “Their mandate was to maximize profitability.” The final step in the privatization occurred on Jan. 1, when a restriction expired that limited an investor from owning more than five per cent of the corporation’s shares.

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Texasgulf, like Potash Corp., is also a low-cost fertilizer producer. Its 35,000-acre phosphate mine site at Aurora, N.C., is the largest integrated phosphate mine and chemical processing complex in the world. Texasgulf has an ore body that represents 30 per cent of the known phosphate reserves in the United States with an estimated life of 75 years.

The spurt in Potash Corp.’s share price following the Texasgulf announcement is just the latest jump. In the past 18 months, its share price had doubled to $50, largely because of the market’s expectations of a steady increase in projected offshore fertilizer sales. Although sales are forecast to grow only modestly in the traditional markets of North America and Europe, demand is expected to soar in such developing countries as China, India and Brazil. There, rising income levels and standards of living are increasing the demand for more and better food.

Asia is the single most important off-shore market for Potash Corp. China bought 20 per cent of Potash Corp.’s product last year, and Childers estimates that by the end of the century it will account for 40 per cent of the company’s sales. “China is the biggest,” said Childers, “but sales are increasing to places like Indonesia and Malyasia, too.” The industry’s direct marketing campaign is the key to its success. Canpotex, the jointly owned marketing arm of four Saskatchewan potash producers, has agronomists take part in the rural field days that occur in towns across China at the end of each harvest season. At that time, the test plots of fertilized crops are harvested and onlookers are invited to guess the yield. The winner gets a bag of potash. Said Childers: “I guess there’s not a whole lot for people to do over there so everybody comes out. I guess it would be like Saskatchewan in the 1920s or 1930s.”

But Canpotex’s marketing does not always result in sales of Canadian potash. In China, potash purchases are centralized in one government agency that negotiates bulk purchases. Despite the farmers’ preference for the “lucky” pink potash, government bureaucrats will happily buy white potash–if better prices are offered. Still, in the world of cutthroat commodity competition, even a tiny advantage–like the difference between pink and white–is a welcome one.

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