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Could Sirius Minerals be swept along in potash industry merger mania?

Potash industry rationalisation could help to take out costs and underpin prices

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A growing world population will mean a need for more food and thereby higher demand for fertiliser

The mega-merger between Potash Corporation of Saskatchewan Inc (NYSE:POT) and Agrium Inc (TSE:AGU) could bode well for smaller industry players such as Sirius Minerals PLC (LON:SXX).

Potash, whose core product is used in fertilizer, on Monday said it had agreed an all-share tie-up to create a company set to be worth about US$27bn.

Falling prices and a decline in spending by farmers, putting pressure on suppliers to merge, is said to have prompted Potash to do the deal with Agrium, which supplies farming products and services in North America, South America and Australia.

Broker Deutsche Bank forecasts a wave of industry mergers to combat rising costs, posing the question as to whether smaller players with promise such as Sirius could get carried along with it.

Although Sirius is at a relatively early stage in developing its polyhalite mine on the North Yorkshire Moors, its share price topped 45p last month versus about 12p in 2013 as investors have spotted a potential winner.

While analysts have said it may be too early to talk about a bid for the company, events now taking place in the industry could be positive for its longer-term prospects.

What is certain is that a growing world population will mean a need for more food and thereby higher demand for the fertiliser needed to grow it, spelling a potentially bright long-term future for Sirius and rivals.

Industry rationalisation could also help, taking out costs and underpinning prices.

Professor John Colley at Warwick Business School said: "Farmers will be faced with more limited product ranges and less supplier choice. Expect higher prices to be introduced as well as lower industry costs.

"Provided the (Potash Corp) board can sort out who is in charge following the 'merger of equals' then this should be good news for shareholders."

Consolidation bonanza

Returning to the immediate future, Deutsche Bank said the Potash deal and others like it in the last 12 months were likely to be followed by many more in the next year in the broader chemical industry.

It said European players set to be involved included the likes of Akzo Nobel, Arkema, BASF, Covestro, Johnson Matthey and Symrise.

Deutsche said robust first-half and third-quarter results in the sector would lead to further upward pressure on consensus sector forecasts.

“We believe the consolidation bonanza we have seen in the past 12 months (10 large global M&A deals in the sector) has much further to go,” the broker said.

It added: "We see several reasons to remain constructive on chemicals (self-help, capacity discipline, M&A) and note that even following the recnt sector strength there are numerous valuations that are attractive."

Quick facts: Sirius Minerals PLC

Price: 3.51 GBX

LSE:SXX
Market: LSE
Market Cap: £251.22 m
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