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Potash Corp. buying K+S AG far from a sure thing

Potash Corp. of Saskatchewan Inc., the Canadian fertilizer producer, wants to acquire German potash supplier K+S AG.

The market may be factoring in a roughly 60-per-cent chance that Potash Corp. of Saskatchewan successfully acquires K+S AG, but a minumum of one analyst thinks the possibilities much lower.

Ben Scarlett at J.P. Morgan downgraded K+S to underweight from overweight as he sees the probability of a deal at nearer to one in three.

“An offer is likely to face substantial execution risk, and its completion will probably necessitate anti-trust or other concessions, limiting synergies,” the analyst said inside a note to clients.

The geographic overlap of the two companies is limited and conventional anti-trust considerations look minimal, but Scarlett is worried about Potash Corp.’s involvement within the Canpotex cartel.

He noted that global potash markets haven’t improved the situation dramatically much since Potash Corp. tried to buy 51 per cent of K+S in 1997 – an effort that was blocked by German authorities – however the industry has consolidated and also the number of individual producers has declined, specifically in Europe.

The analyst thinks there is a good chance that European and United states anti-trust authorities will examine the outcome such a deal could have in their own regions, in addition to invoke problems that require approval from authorities in places such as Brazil, China and India.

“We also believe there\’s a good chance Potash Corp may have plans to address anti-trust concerns, but we observe that an purchase of K+S is effectively an unprecedented transaction poor the industry and it is probably not possible at this stage to fully determine the reaction from global authorities,” Scarlett said.

He cut his price target on K+S shares to 33 euros from 38 euros, well below Potash Corp.’s offer of 41 euros, and noted that board approval would likely require a bid of fifty euros per share.

At the same time frame, Scarlett highlighted weakening fundamentals within the potash market as both Chinese and Indian contracts are expected to settle in a US$20 per tonne, or six-per-cent, discount in 2016.

“These 4 elements could prove to deter Potash Corp from materially increasing its offer at this time,” the analyst said.