Canadian fertilizer giants Agrium Inc. and Potash Corp. of Saskatchewan Inc. said they were in preliminary talks about a possible merger of equals as the industry contends with slumping earnings amid persistently low prices for crop nutrients.
However, the companies also said no decision had been made, and there is no assurance the discussions would result in any potential deal, which would create a company with a total market value of more than $ 28 billion.
Bloomberg News earlier on Tuesday reported that the fertilizer makers were in advanced merger talks, with a deal announcement possible as soon as next week.
For the first six months of this year, Agrium’s retail business generated sales of $ 8.1 billion, down 3.6% from the year-ago period. By comparison, the sales at its smaller wholesale fertilizer operation fell 25% to $ 1.5 billion over the same period.
For Calgary-based Agrium, a deal would greatly expand its product of potash and other fertilizer ingredients, representing a bet that demand and prices for these products have bottomed and are poised for a rebound.
Potash “deliveries in the second half of 2016 are expected to be supported by…the normal seasonal upturn in demand and the recent supply agreements with China and India,” two of the world’s biggest markets for the crop nutrient, Agrium said earlier this month in its earnings release.
In New York, Potash stock rose 11% to $ 17.84, giving it a market capitalization of about $ 15 billion, according to FactSet. Agrium has gained 6% to $ 94.84 for a total value of about $ 13 billion.
Talk of a potential deal lifted the stocks of other fertilizer producers. Mosaic Co. shares jumped 8% to $ 30.19, while CF Industries Holdings Inc. added 4% to $ 25.99.
Potash was subject to a hostile takeover bid from BHP Billiton Ltd. in 2010, but the Anglo-Australian mining giant abandoned the offer that same year amid Canadian government opposition over the possible loss of what it deemed to be a strategically important company.
The latest merger talks come after an earlier failed attempt by Potash to diversify its operations into salt production. The company tried to acquire K+S AG, a move that would have helped to consolidate the fertilizer sector but dropped its hostile $ 8.8 billion bid in October 2015 after the German-based rival balked at the offer as too low.
The talks between Potash and Agrium differ because they are friendly. It also is unlikely Canadian regulators would oppose such a tie-up because both companies are Canadian-based, posing no risk to the loss of jobs and tax revenue to a foreign jurisdiction.
Weak potash prices most recently stem in part from delays in the signing of supply contracts with China and India, two of the largest fertilizer markets. That compounded problems last year resulting in part from Brazil’s slumping currency, which undercut demand for the fertilizer from the big customer.
The industry’s woes have weighed on the sector’s stocks. Before the gains Tuesday, Potash shares had fallen 39% over the past year. Agrium had dropped 14%; Mosaic, 32%; and CF Industries, 57%.
For the first six months of 2016, Potash’s earnings fell 75% to $ 196 million, as the company’s average sale price for the fertilizer fell to $ 154 per tonne in the second quarter, from $ 273 in the year-ago period.
Agrium’s earnings declined almost 18% to $ 568 million in the first half of 2016, from the year-ago period.
Both companies, though, are more optimistic for potash over the rest of the year amid signs volume sales will increase. Outside of North America, Potash and Agrium sell the crop nutrient through Canpotex, a Saskatchewan-based exporter that also includes Mosaic.
Last month, Potash said Canpotex had signed a new supply pact with Indian customers to cover the next three months and a similar deal with China was being completed.
Any potential merger deal between Potash and Agrium would add to a string of transactions involving the global farming sector, including the pending merger of Dow Chemical Co. and DuPont Co., both of which maintain large seed and crop chemical divisions.
In February, China National Chemical Corp. offered to pay $ 43 billion deal to acquire Swiss pesticide maker Syngenta AG.
Since May, German pharmaceutical giant Bayer AG, which also makes seeds and pesticides, has been pursuing a takeover of Monsanto Co., the world’s largest supplier of crop seeds and genetics. Monsanto has rejected Bayer’s proposals several times.
Tess Stynes contributed to this article.
Write to Ben Dummett at ben.dummett@wsj.com
Corrections & Amplifications: Agrium had earnings of $ 568 million in the first half of 2016, and Potash’s average sale price for potash fertilizer fell to $ 154 per tonne in the second quarter. An earlier version of this article misstated those figures.
(END) Dow Jones Newswires 08-30-161215ET Copyright (c) 2016 Dow Jones & Company, Inc.
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