Trans-border deals to create giant potash producers run aground on the rocks of politics – but when both players are Russian, the politics have a way of being squared. Hence a new Russian rival to PotashCorp of Saskatchewan is on the rise, through the projected takeover of Silvinit by UralKali, both London-listed companies that mine the world’s second largest source of potassium and magnesium salts. Strategically, the new entity, with a market value of $23.9bn, makes sense for the reasons canvassed when BHP Billiton tried to buy Potash – chemical fertilisers are a superb secular growth story, and the scarcity of raw materials creates a high barrier to entry.
More politically incorrectly, the industry is already divided into effective sales organisations, and this consolidation will give producers even greater freedom to set prices. Canadian producers, led by Potash, have the Canpotex group, while Silvinit will now join in the BPC group, built around Belarusian Potash Company. On 2009 figures, BPC claims adding Silvinit would give it 44 per cent of global potash export trading. The logic of the deal is thus obvious to anyone who got past the first week of Economics 101.
Nevertheless, the shares of Silvinit fell 13 per cent on the Micex, while UralKali was down only slightly. That is explained by a Byzantine structure typical of deals between oligarchs, in which UralKali is paying cash of $1.4bn to buy out a 20 per cent blocking stake, but offering shares for the rest. The share exchange, supposedly for a nil premium, is at a discount to the market price that had been reached after months of deal speculation.