Israel Chemicals Ltd. (TASE: ICL) is not the only fertilizer maker held by Potash Corporation of Saskatchewan Inc. (NYSE; TSX: POT). For years, the Canadian giant's strategy has been to acquire stakes in some of its competitors, including Jordan's Arab Potash Company.
But is seems that Israel Chemicals is more than just a financial holding. A takeover of Israel Chemicals will greatly strengthen Potash Corporation in the Asian market, where Israel Chemicals has strong sales in China and India, mainly because of Israel's proximity to these markets. Potash Corporation's physical remoteness from these countries means it has no substantial foothold in them, and its main markets are Latin America and Europe.
China and India are considered fast-growing markets, mainly because of demand. Another important advantage for Israel Chemicals over its competitors is the efficiency of its production. Israel Chemicals' production processes are considered simpler and easier than those of other potash producers in the world, thanks to the advantages of the Dead Sea. Israel Chemicals also has advantages in inventory storage thanks to low-cost long-term storage at Sodom with its high temperatures and aridity.
As a result, when the potash market is weak, Israel Chemicals continues high potash production and stores the surplus, which means it is ready when markets recover.
There is financial and business logic for a deal, but there is also a reason why it has never been executed over the years. A merger between Israel Chemicals and Potash Corporation must overcome several regulatory hurdles. Although the Ministry of Finance seems pleased by the idea, there will undoubtedly arise in the future voices and pressure against the transfer of an expensive and important natural resource to foreign hands.
Control of Israel Chemicals is not just control of a natural resource, but also dealing with tightening regulation. In addition, Israel Chemicals is a major employer in southern Israel. Would an aggressive company like Potash Corporation be able to manage sensitive labor relations with the employees? The employees would definitely not stay silent, and would fight for their rights ahead of a deal.
Another issue is cartelization. The global potash industry is highly concentrated, because of the market's high entry barriers. In fact, the market is so concentrated that the main potash producers control prices by controlling production. Would a merger of the world's largest and fifth largest potash producers pass the regulatory test? This is not a trivial question. The road to the realization of Potash Corporation's longstanding dream of taking over Israel Chemicals is still very long.
Published by Globes [online], Israel business news - www.globes-online.com - on October 31, 2012
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