March 6, 2013 (Source: Financial Times) — It’s not just Middle Eastern policy wonks and diplomats who are watching Israel’s Prime Minister Benjamin Netanyahu as he scrambles to form a coalition government ahead of a March 16 deadline. It may not be obvious at first hand, but agribusiness executives around the world are keeping tabs as well.
The new Israeli government will rule on the fate of a potential multibillion dollar fertiliser deal: the tie-up between Israel Chemical, a fertiliser group eyed by Potash Corporation of Saskatchewan.
The deal goes beyond the niche potash mining industry because ICL is one of the few global producers of the fertiliser that does not sell its potash through one of the two dominant marketing cartels. If PotashCorp acquires ICL, the two cartels and their affiliates will account for 96 per cent of potash sold to India (up from 80 per cent), 95 per cent of the Chinese market (up from 80 per cent), and more than 80 per cent of the Brazilian market (up from about 66 per cent), says Andrew Benson, analyst at Citigroup in London.
PotashCorp, which owns 14 per cent of ICL, has made overtures to the Israeli group and has approached the government, on a potential deal that some industry analysts believe could be worth up to $20bn. Wayne Brownlee, chief financial officer of PotashCorp, reiterated the Canadian group’s desire to hold “a controlling position in the company” at an industry conference in Miami last week.
The Israeli government has a golden share and hence veto power over the talks, and ICL’s biggest shareholder, Israel Corp, is said to be quietly making its case with the country’s authorities about the deal’s economic rationale. At the conference, Mr Brownlee also said that talks with ICL’s stakeholders were ongoing and that PotashCorp was “trying to have a dialogue with the government, so that we can address the concerns that they would have”. The list of hurdles PotashCorp and Israel Corp face in getting the deal done is a long one:
- ICL’s Dead Sea potash plant is a major employer in the Negev region, with about 5,000 workers. Employees at ICL have staged demonstrations because of worries about their jobs. They fear that if PotashCorp were to buy ICL, it would move production to Jordan, on the other side of the Dead Sea, where the Canadian company owns 28 per cent of Arab Potash.
- The Dead Sea operations are regarded as a strategic asset as well as a revenue earner for the Israeli state, and Citigroup estimates ICL pays the government $200m in royalties, tariffs and fees a year, on top of $300m in annual income tax. Analysts say that the royalties paid by ICL to the state could be a sticking point in negotiations between PotashCorp and the Israeli government.
- Even if the Israeli authorities approve the transaction, the deal could still be blocked on competition grounds by authorities in other jurisdictions. Two marketing cartels – Canpotex, representing PotashCorp, Mosaic and Agrium, and BPC, representing Uralkali and Belaruskali – dominate the international potash trade, and further consolidation means less competition in the fertiliser market for big importers such as China, India and Brazil. “The political establishments in those countries will have a keen interest in the impact of further consolidation,” says Mr Benson of Citigroup.
- PotashCorp says that any deal will need approval from the other two Canpotex members to ensure that there are no conflicts of interest from the Israeli company that had been a competitor.
As Mr Brownlee told analysts and investors in Miami: “This is going to be a long birth.”