What: Shares of Potash Corp. (NYSE:POT) are up 13% as of 10:45 a.m. EDT today after news broke that the company is in advanced merger talks with fellow fertilizer producer Agrium (NYSE: AGU).
So what: Fertilizer has been a tough business over the past couple of years. Realized prices on potash -- the main fertilizer product that is the namesake of the company -- have been on a steady decline for some time after two of the world's largest manufacturers -- Uralkali and Belaruskali -- ended their pricing agreement back in 2013. This has had both Potash and Agrium scrambling to preserve profitability. Potash has already cut its dividend twice in the past year, and Agrium has reduced its profit forecasts down several times. This also comes on the heels of Potash's failed attempt to acquire German fertilizer manufacturer K+S. Clearly, consolidation has been on the mind of companies in the industry.
The consolidation of these two companies, though, would give the combined company huge pricing power, even more so than under its common marketing agreement, Canpotex. The pricing power that this potential merger presents is so great that shares of other potash manufacturing companies are rallying today on the news of the possible deal.
Now what: Before getting too excited about this deal, though, there is one thing that you need to keep in mind. This is a merger of two major producers of a very strategic commodity, so chances are that there will be some regulatory issues that will need to be settled before the deal can indeed happen. This is one of those cases where investors shouldn't make any changes to their long-term thesis until the ink is dry. Any other approach to this deal is speculation.