Analysts debate merits of Incitec Pivot fertiliser unit sale

Analysts debate the merits of the sale of Incitec Pivot’s fertiliser business. Picture: Supplied

As Incitec Pivot confirmed on Wednesday what many in the market had suspected – that a potential sale of its fertilisers unit could be afoot – analysts question the merits of such a move.

“Our understanding is that Fertilisers has a low book value so material tax would need to be paid on any sale,” said Morgans analyst Belinda Moore.

Incitec Pivot on Wednesday confirmed it had received a number of approaches over the potential acquisition of its fertilisers unit, which is currently subject to a potential demerger and has previously been on the market through investment bank UBS.

It comes after DataRoom reported on May 31 that speculation was mounting that either a major equity raising or large transaction was afoot at Incitec Pivot after the $5.9bn group paused its share buyback because of “something material” happening in the background.

As reported at the time, some suspected it had fielded it a buyout approach for the company as a whole or the fertiliser unit.

“As we suspected, given the $400m share buyback has been delayed, there is corporate interest in the Fertilisers business,” Ms Moore said in a Morgans note released Wednesday.

“While the Fertilisers business has a strong market position on the east coast of Australia, it also has gas issues.”

She said that the only near-term catalyst for the stock was if some form of corporate activity was to emerge and at an attractive price.

Shareholders would then be left with Dyno Nobel which is a lower quality explosives business compared to Orica.

Ms Moore said Morgans recognised that after Incitec Pivot’s ammonia manufacturing facility Waggaman in Louisiana was sold, and possibly Fertilisers, Incitec Pivot would have a very strong balance sheet which could support material capital management and or mergers and acquisitions.

But in the meantime, Morgans noted that fertiliser prices had continued to decline.

Incitec Pivot was also lacking leadership following poor execution with its managing director Jeanne Johns recently stepping down and the proposed chief executive of the Fertilisers unit Christine Corbett also leaving last month.

Incitec Pivot, a fertiliser and explosives manufacturer, has been clear in emphasising that its plan to demerge its fertiliser unit remains on the table, despite tougher industry conditions that have seen fertiliser prices collapse and higher energy costs, saying it will now happen at a later stage.

But some believe that the deal no longer makes sense, including activist investor John Ho, the founder of shareholder Janchor Partners who was appointed to the board this year.

Global rivals Nutrien, which operates in the local market, and CF Industries are thought to have knocked on Incitec Pivot’s door numerous times for the fertiliser operation.

But the understanding is they were not prepared to offer a high enough price.

Both already have access to phosphate that Incitec Pivot produces elsewhere in the world, so they would not offer a price that values that, but it would expand their distribution into the Australia market.

Private equity firm BGH Capital also made an approach about five years ago for the fertiliser operation, offering between $300m and $400m.

Other possible buyers of the fertiliser business could be US-based Koch Industries or The Mosaic Co.