Potash Corp. (POT) confirmed the company is in preliminary discussions to merge with Agrium (AGU). Both stocks surged on the news, but are now starting to give up those gains.
The biggest issue is that the deal would only provide short-term benefits if the companies cut supply of potash. Long term though, higher prices will bring on more supplies including the Jansen mine from BHP Billiton (BHP).
Potash Corp. forecasts 2016 potash sales of up to 8.8 million tonnes while Agrium is targeting up to 2.4 million tonnes. Of a market with 60 million tonnes, the combination isn't going to make a substantial impact. Not to mention, both companies already belong to Canpotex questioning how any combination would change the market outside of cutting more production.
Cowen doesn't think the merger makes a lot of sense. The analyst doesn't see a combination impacting the market, hence defeating the purpose. My on Seeking Alpha warned that the stock trading around $16 wasn't justified, but the very reason the stock was holding at that price was suspicious. Now we know why, but this reason wants me to run away from the stock and fast. Potash Corp. sounds desperate.
Disclosure: No position