Morningstar | No Changes to Our Long-Term Outlook as Nutrien Announces Deal to Acquire Ruralco; Shares Undervalued
Nutrien announced an agreement to acquire Ruralco in an all-cash offer of AUD 4.40 per share, which is a purchase price of AUD 469 million, or $335 million based on an AUD 1.40 per $1 exchange rate as of Feb. 27. The announcement comes just a day after Nutrien released a statement confirming that the two companies were in discussions regarding a deal. The acquisition is consummated at a 9.2 times enterprise value/EBITDA multiple based on Ruralco's 2018 EBITDA, representing a 44% premium for Ruralco shares.However, Nutrien management expects to be able to achieve a 5.6 times multiple after synergies. We think this is a reasonable estimate, as Nutrien will be able to begin selling its higher-margin proprietary products at Ruralco's stores and eliminate some back-office expenses, both of which should boost profit margins. Further, even without synergies, the acquisition is only slightly above the comparable transaction average of 8.8 times based on PitchBook data.
While Nutrien will likely have to divest some of its Australian stores, we think the transaction will ultimately receive regulatory approvals and close by the end of 2019. Having updated our model, we view the transaction as value-accretive, but maintain our $68 per share fair value estimate for Nutrien due to the small deal size. Our Canadian-dollar-denominated fair value estimate falls to CAD 89 per share due to a weakening of the U.S. dollar versus the loonie since our last update. We maintain our narrow moat rating for Nutrien.
As we wrote in our Feb. 26 note, we are in favor of Nutrien's tuck-in acquisition strategy to grow its retail business, as the company can generally grow the per store profit margins of recently acquired locations by selling its proprietary seed and crop chemical products and offering its digitally integrated agronomy services. All of these support higher profit margins than typical agricultural retail products.
Nutrien Ltd is Canada-based crop nutrient producer and distributer of potash, nitrogen and phosphate products for agricultural, industrial and feed customers worldwide. The Company is focused on retail, potash, nitrogen and phosphate mining and processing operations. The Company's retail operations serve growers in a number of countries across the United States, Canada, South Africa, Australia and South America. The Company operates six potash mines in Saskatchewan and has a mine in New Brunswick in care-and-maintenance mode. The Company operates integrated phosphate mining and processing facilities, as well as a number of smaller upgrading plants in the United States.
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