K+S Potash’s value
Potash Corporation (POT) is the top potash producer in the world. The company’s nameplate capacity accounted for about 19% of global potash capacity. Merging with K+S Potash would enhance Potash Corporation’s capacity as well as expand its global reach. More importantly, K+S is currently developing a legacy mine in Saskatchewan. Potash Corporation would benefit from this additional capacity.
During the 2Q15 earnings call, Potash Corporation’s management said the acquisition would broaden the company’s portfolio to include products such as salt and SOP (sulfate of potash), a specialty product. The company would also be able to access nitrogen and phosphate from various locations around the world. So why did Potash Corporation withdraw its proposal?
Why did Potash Corporation withdraw?
Potash Corporation cited the weakness in global equities, low commodity prices, and “lack of engagement by K+S management” as the reasons it withdrew the deal to acquire K+S.
The increased capacity and global reach would certainly be positive for a company like Potash Corporation, but the weak farm economics deeply impact the demand side. Crop prices have declined since the beginning of 2015. Corn and soybean prices are down 8%, and wheat prices are down 12%. This low crop price environment results in lower profit potential from farmers, which is negative for fertilizer applications and companies like Potash Corporation, Mosaic (MOS), CF Industries (CF), and Agrium (AGU).
The VanEck Vectors Agribusiness (MOO) has fallen 11.6% year-to-date. Recently, Mosaic (MOS) also lowered its guidance, which led the stock to fall by 7%. For more detail, read Mosaic and Potash: Why the Recent Slump?
Adding capacity amid the current slump and the weak future outlook would prove negative for Potash Corporation as well as its shareholders. In the next article, we’ll look at valuation multiples for these companies and what these metrics mean for investors.