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Agrium, Rivals Seen Focusing On Smaller Deals

“Consolidation of the fertilizer industry worldwide is far from over.”

– JOERGEN OLE HASLESTAD

Aprotracted takeover battle in the global fertilizer industry ended this week with a victory for CF Industries Holdings Inc., but the losers are unlikely to wait long before climbing back into the fray.

CF Industries’ agreement to acquire Terra Industries brought to a close a year-long battle in which CF was alternately cast as both predator and prey.

In the end, the $4.7-billion CF-Terra deal scuppered Agrium Inc.’s efforts to snap up CF, while forcing Norway’s Yara to bow out of a bidding war for Terra.

Even so, the forces pushing both of those fertilizer companies to grow through acquisitions won’t fade away. Their strategies, however, may need to be adjusted.

Although Agrium dropped its bid for CF, the Canadian fertilizer maker has already said it will seek fresh growth opportunities across the agricultural value chain – from supplying farmers to producing fertilizers, and other businesses in between.

Agrium’s growth ambitions mirror those of other players in the sector. While mega-deals are unlikely, most analysts see scope for smaller acquisitions, as companies look to replace aging assets, secure strategic supplies and fill gaps in their geographic footprints.

That said, M&A activity and rising fertilizer prices have begun to drive up valuations in the industry. As a consequence, fertilizer makers may have to expand through allied businesses.

Calgary, Alberta-based Agrium is already the largest North American agricultural products retailer and it has repeatedly expressed a desire to further expand its retail footprint.

“Not that long ago, Agrium bought some retail outlets and I think that is what they will continue to do – focus on retail and focus on the potash expansion, which is what the market wants them to do anyway,” said Broadpoint AmTech analyst Edlain Rodriguez.

Agrium chief executive Mike Wilson is a shrewd dealmaker, who has grown the company through a series of takeovers. Many believe he is unlikely to sit on his hands as larger rivals look to consolidate.

Wilson led Agrium’s takeovers of Royster-Clark in 2006, UAP in 2008 and numerous small deals, including its acquisition of 32 retail outlets from Archer Daniels Midland in 2007.

One gap in Agrium’s retail footprint is Western Canada. Although the company does have a presence in the region, the dominant farm-supply retailer there is Viterra, a grain handler that also owns over 250 retail outlets in the region.

“I believe Viterra and Agrium would be a very nice matchup,” said independent analyst Chris Damas, who argues that Viterra’s stock has languished despite the company’s growth prospects.

That said, there are drawbacks as well. Many of Viterra’s retail outlets are integrated with its grain terminals, and Agrium is not familiar with the grain-handling business.

“Viterra is in so many other different businesses that don’t fit Agrium’s sweet spot,” said analyst Robert Winslow of Wellington West Capital Markets. “Not to say it’s impossible, but I think it’s unlikely.”

David MacKay, president of the Canadian Association of Agri-Retailers, notes that other possible targets in Canada include privately owned James Richardson, with about 70 to 80 outlets, along with smaller networks owned by Cargill, Paterson Grain, and Parrish & Heimbecker.

Agrium’s growth ambitions are echoed by others in the sector, as a sharp decline in fertilizer demand in 2009 is already giving way to a strong rebound in 2010, pushing up fertilizer pricing even as the price of major grains have fallen in recent weeks.

Norway’s Yara, despite bowing out of the takeover battle for Terra, remains upbeat on consolidation prospects within the fertilizer sector.

“Consolidation of the fertilizer industry worldwide is far from over,” said Yara chief executive Joergen Ole Haslestad.

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