Buyouts Bolster Fertilizer Maker As Potash Turns Into Hot Commodity
biz.yahoo.com
China is one of the world's biggest exporters, but some things it has to ship in. That's why a guild of Canadian companies could get it to pay through the nose for potash.
Potash, a key mineral used for fertilizer, can be mined in only a few parts of the world -- notably Saskatchewan, Canada. Now, demand is exceeding supply by so much that China's Sinofert, which buys potash on one-year contracts, agreed on Apr. 16 to pay $576 a ton for 1 million tons of potash -- up 227% from last year.
The other party in the deal was Canpotex, a marketing body created jointly by Canada's three big potash exporters. One of them, Agrium (NYSE:AGU - News), saw its shares soar to a new high on the news.
"Since China is the biggest buyer of potash internationally, there was some speculation that it could hold out over the summer," said Richard Downey, head of Agrium's investor relations. "It was significant that the contract was signed now."
Beijing Office
Agrium also signaled its seriousness about China on April 11, when it opened a representative office in Beijing. The firm already had been doing business in the Middle Kingdom for a while, through Canpotex and through its minority stake in Hanfeng Evergreen, a specialty fertilizer company there. Opening a field office was the next logical step.
Agrium's busy April has brought a move into the other side of the world as well. On Apr. 10, it bought 70% of Common Market Fertilizers, a Western European distributor. The company says the buy will support the new nitrogen facility it's building in Egypt -- its first such facility outside the Americas.
"We are a growth company," said Downey. "You've got to be global in the agriculture industry."
Buyouts have long been a key part of this strategy. Agrium has made nine of them in the last 10 years. It's expanded its capacity for nitrogen fertilizer by buying the nitrogen assets of oil companies, who make the fertilizer from natural gas. Nitrogen is the company's single biggest product line, bringing in almost 40% of total revenue.
Rising gas prices can challenge the economics of this business. But so far, "record nitrogen prices (are) more than offsetting a slight increase in gas costs," according to a Feb. 13 note from CIBC World Markets. In the fourth quarter, nitrogen revenue grew 66% while gross profit rose 240%.
Agrium also has bought some phosphate mines and operations, which now contribute 10% of sales. Potash, which the company has been selling since the 1960s, provides about 8.5% of revenue. Both these product lines saw triple-digit sales and profit growth in the fourth quarter.
But the former Cominco Fertilizers isn't just about fertilizers. The buyouts also have brought in new parts of the supply chain.
Thanks to a series of acquisitions starting in the mid-'90s, Agrium has created a network of more than 500 retail outlets selling seeds, fertilizers and pest-control services. In the Eastern and Midwestern U.S., the stores go by the name Crop Production Services; in the western states, Western Farm Service; and in Argentina and Chile, Agroservicios Pampeanos.
Agrium's retail buyout strategy has been especially aggressive in the past two years. In 2006, it bought Royster-Clark, doubling the segment's size. Last year, it snapped up 32 stores from Archer Daniels Midland (NYSE:ADM - News).
In December, the company announced a $2.65 billion deal to buy UAP Holdings (NasdaqGS:UAPH - News), which will add another 370 locations and make for the biggest fertilizer retailer in North America. In a Feb. 14 note, Scotia Capital analysts said the UAP buy will move Agrium toward its goal of becoming "the Wal-Mart of U.S. agricultural retail."
Downey says the North American retail sector is "somewhat overbuilt," leading to attractive prices on retailers these days.
"We've had more acquisitions in retail partly because valuations on retail haven't gone up as much as on wholesale," he said. "Retail has provided more counter-cyclical investment opportunities than pure fertilizer (wholesaling)."
Agrium seems to be succeeding so far in turning these cut-rate retailers into gold. In the fourth quarter, the retail segment's EBITDA rose to 8.5% of net sales from 2% last year. Scotia Capital's note remarked that this is "an especially strong showing given that this includes the Royster Clark acquisition that has historically produced an EBITDA to net sales ratio of only 5%."
Still, the UAP buyout hasn't gone completely smoothly. Agrium had hoped to close the deal Feb. 26, but wound up extending its offer to April 30, reportedly because it needs to settle antitrust issues. However, on April 18, the firm said it had reached a deal with the Federal Trade Commission and expected to pursue the buyout again in early May.
Controlled-Release Fertilizers
In addition to wholesale fertilizer and retail stores, Agrium created a third major division last year called Agrium Advanced Technologies. This grew out of the firm's 2006 buyout of Nu-Gro Technologies, which brought it a line of patented controlled-release fertilizers for lawn and garden care. A later buyout of Pursell Technologies the same year added to this unit.
After the buyout, Agrium boosted Advanced Technologies' production capacity, helping sales grow 94% in the fourth quarter. Still, the division provided only about 0.5% of total revenue.
Overall, fourth-quarter profit jumped 396% from the prior year to $1.24 a share, while sales gained 59% to $1.43 billion. Profit for the full year nearly quadrupled to $3.25 a share.
Analysts polled by Thomson Reuters don't expect Agrium to replicate that, but they still see 2008 earnings rising 82% to $5.90 a share. |
