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June 22, 2012 7:24 pm

Viterra asset sales under preliminary competition review

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Glencore’s (LON:GLEN) planned sale of CAD 2.6bn in Viterra (TSE:VT) assets to Agrium (TSE, NYSE:AGU) and Richardson International is under a preliminary competition review, a complainant told this news service.

Lynn Jacobson, president of the Wild Rose Agricultural Producers, a group that represents Alberta farmers, sent a letter to Canada’s Competition Bureau last Thursday. He said he received a call on Monday, asking him to clarify his concerns. The representative said the call was part of a preliminary review, Jacobson said.

“We had a talk. They understand our position and our concerns. They are going to want to talk to us again,” Jacobson said. “The person said that they had concerns expressed by other groups and individuals too. They said what we were saying is not new to them.”

A representative from the Bureau said that it can start preliminary investigations as early as the day a transaction is announced and a company does not need to make a filing to trigger a review. The official declined to provide information on the Viterra case.

The three-party asset sale has been negotiated, and was announced the same day as Glencore’s acquisition of Viterra on 20 March, but only occurs after the larger Viterra/Glencore transaction closes.

Glencore, the global, Swiss-based commodities trader, has already received approval from the Bureau to acquire Viterra, a Canadian grain handler, but is still awaiting approval under the Investment Canada Act (ICA). The ICA requires that a foreign acquisition is a “net benefit” to Canada.

The companies disclosed a 30-day extension of the ICA review on 15 June. Glencore has said that it expects to close on Viterra by the end of July. “We still hope to close in July. That is the official hope. Let’s put it that way,” said a person briefed on the matter.

The larger deal is structured so that it can close without needing approval of the follow-on asset sales. However, Glencore has planned to use the asset divestitures to Canadian buyers Agrium and Richardson to help ensure its acquisition passes ICA, this news service has previously reported.

Calming farmers’ fears

The asset sales have attracted scrutiny from a number of farm groups, commodity groups, grain growers, producers, and the Canadian province where Viterra is based, Saskatchewan. Agrium is buying fertilizer producing capacity and agricultural input stores from Viterra. An Agrium spokesperson did not return a request for comment.

Behind the scenes, conversations between the companies and stakeholders have been going on since prior to the deal announcement, representatives of stakeholders told this news service.

Norm Hall, president of the Agricultural Producers Association of Saskatchewan, said that Glencore approached farm groups with a “heads up, and we knew what was going to be happening.” Since then, the group has had further discussions with Glencore and Agrium, he said.

Jacobson said he was also contacted by Agrium and given an information pamphlet. “[They] said it would calm our fears, but it doesn’t calm our fears,” he said.

Both Hall and Jacobson said it would be preferable for Glencore to hold on to the Viterra assets rather than selling to Agrium. “Even if they sold half of the retail stores it would be better (than the current plan),” said Hall.

Doug Chorney, with Manitoba-based Keystone Agricultural Producers, said that a lot of people are watching this transaction closely. He said he has had calls from lawyers in Washington DC and investment bankers, as well as representatives from the three companies, including Glencore representatives based out of the company’s marketing office in Rotterdam. The Bureau is operating on the basis of legitimate concerns, he added.

Fertilizer prices may grow

The main concern with the deal is that Agrium will be able to raise wholesale price of fertilizers, through a vertical integration and increased market share in both fertilizers production and agriculture retailing.

According to Agrium’s 2011 Annual Report, the company is the third-largest producer of nitrogen (ammonia-based) fertilizers in the world.

An Informa Economics report commissioned by the Saskatchewan Ministry of Agriculture found that Agrium’s purchase of Viterra’s 34% stake in Canadian Fertilizers would increase its share of Canadian ammonia production from 46% to 53%. Ammonia is a critical component in making nitrogen-based fertilizers, which is the largest nutrient input required by farmers.

Four companies currently make up 90% of the market share for ammonia. Post-acquisition that number would increase to 97%, according to Informa. The Bureau’s four-firm concentration threshold in the wholesale sector is 65%, suggesting a need for detailed investigation in this area.

Agrium is also the world’s largest retailer of agricultural inputs, with 65 stores in Western Canada. The planned purchase of 232 Western Canada-based retail stores from Viterra would increase the company’s market share in Saskatchewan from 9% to 42%, according to Informa.

The Competition Bureau criteria suggest the need for detailed investigation of any company with market share higher than 35%.

Agrium also exerts market power through its contracts with independent retailers in Canada. James Battershill, policy analyst with Keystone Agricultural Producers, based in the province of Manitoba, said these contracts are “somewhat flexible”, and there tend to be multiple purchasing contracts in place, so it is less of a concern.

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