March 20, 2012 / 9:38 PM / 5 years ago

Analysis: Agrium emerges as a quiet winner in Viterra deal

TORONTO (Reuters) - Glencore International PLC's (GLEN.L) C$6.1 billion bid for Viterra Inc VT.TO marks a quiet victory Agrium Inc (AGU.TO), enabling the Canadian agricultural concern to slip away of some of the blockbuster deal's spoils at an attractive price.

In a side deal with the Swiss-based commodities trader, Agrium will pay about a total of C$1.65 billion for most of Viterra's farm products retail stores and related assets.

The stores will fill a big gap in Agrium's already-vast chain of retail outlets and enable it to move closer to an earnings target for the business that it has long aspired to achieve.

Calgary, Alberta-based Agrium is the largest North American retailer of farm products such as pesticides, fertilizers and seeds, but the company has a small retail presence in the Canadian prairies, an area in which Viterra is strong.

"This substantially increases their market share in Western Canada," said Morningstar analyst Jeffrey Stafford. "We think these are good assets, acquired at a fairly reasonable purchase price. All together a pretty good deal for Agrium as a whole."

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For graphic on Agrium's retail assets:

link.reuters.com/xew27s

For graphic on Viterra's Canadian retail assets:

link.reuters.com/bat96s

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Both the company and analysts are confident that competition authorities will approve the deal, given the large number of independent retail players in the region.

Agrium will acquire about 90 percent of Viterra's 258 Canadian retail facilities, as well as a minority position in a nitrogen-fertilizer plant located in Medicine Hat, Alberta. The plant is majority owned by U.S.-based CF Industries (CF.N).

Agrium's retail presence in Australia also gets a boost. The Canadian company already owns the Landmark network of retail stores there through its A$1.2 billion ($1.26 billion) acquisition of AWB in 2010. A year after that deal Agrium sold AWB's grain-handling business to U.S.-based Cargill.

"We think this deal structure, where Agrium can acquire the farm stores without having to sell off the unwanted parts is far superior to the structure of the AWB deal, where they had to find a buyer for those assets," said Stafford.

EARNINGS BOOST

The Viterra-Glencore deal takes Agrium a big step closer toward its goal of achieving $1 billion in earnings before interest, taxes, depreciation and amortization (EBITDA) from its retail business by 2015.

Agrium's retail business generated $769 million in EBITDA in 2011, or slightly less than 30 percent of its overall EBITDA. The vast majority of Agrium's profits are still generated by its wholesale fertilizer business.

Profit margins from the wholesale fertilizer business tend to be cyclical, reflecting variances in raw material costs and fertilizer demand. Retail, typically a lower margin business for Agrium, serves the company well because it holds up better against the vagaries of the agricultural cycle.

"This deal should allow us to get to the $1 billion target before 2015," said Bruce Waterman Agrium's head of international development in an interview with Reuters.

BMO Capital Markets analyst Joel Jackson estimates the deal will also boost Agrium's annual earnings by 70 cents to 90 cents a share.

($1 = 0.9538 Australian dollars)

Editing by Frank McGurty

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