A Russian billionaire set the terms on Monday for a merger of Russia's top two producers of potash, Uralkali and Silvinit to create the world's No. 2 player.

The deal marks another step in consolidation in the global potash business, where a battle for dominance spurred BHP Billiton's attempt to take over Canada's Potash Corp

, which ultimately failed.

Russia is one of just 12 countries that produce potash, used as an ingredient in fertilizers.

It has become a hot commodity partly due to rising disposable incomes in emerging markets that have changed eating habits and put pressure on food supplies, which in turn have boosted demand for fertilizers.

Uralkali , which like Silvinit is effectively controlled by Russian mining-to-banking tycoon Suleiman Kerimov, offered to buy its nominal rival Silvinit , for cash and shares.

Uralkali's offer for 20 percent of Silvinit, or 1.57 million ordinary shares, is at $894.5 per share.

The cash price for the stake would be $1.4 billion, they said.

Silvinit shares were down 3 percent at $910 on RTS by 1339 GMT, but were down more than 14 percent on the rouble-based MICEX.

They (the terms) don't look very good for Silvinit, it values the business at about 40 percent discount to Uralkali...That's in the interest of Uralkali shareholders, said Bob Kommers, analyst at Deutsche Bank.

They are buying a similar asset at a significant discount, which is very attractive (for Uralkali). There are some operational synergies, which are in line with our estimates. Those are the main benefits.

Analysts at Uralsib estimated that the deal valued Silvinit at a 35 percent discount to Uralkali. They said it was far from a merger of equals.


The merger of the two companies will be completed through a share swap. Kerimov, who serves in Russia's upper house of parliament, will be left with 16.1 percent of the combined group, Uralkali executives said.

He and several associates took effective control of the two producers in May with financing from a state-owned Russian bank, VTB .

A merger looked increasingly likely after investors friendly to Uralkali's owner bought stakes in Silvinit in August.

There was speculation earlier this year that mining giant Rio Tinto could take a stake in Uralkali, but this came to nothing.

We are looking with interest at the active and bubbling M&A market in potash but at the moment we are just observing because we are completely focused on our current deal, Uralkali CEO Pavel Grachev told a conference call.

And we have not received or are reviewing any proposals to buy other assets, he added, and reiterated that Uralkali was not in takeover talks with Rio.

Uralkali said the deal had already gained the support of 53 per cent of its ordinary shareholders and from 67 percent of Silvinit's.

The Uralkali board approved a 50 billion rouble borrowing plan which to finance the cash buyout of Silvinit shares. Chief Financial Officer Viktor Belyakov said rouble borrowing was preferable to a Eurobond, at least until the merger closed.

Liquidity on the Russian market is very high so we don't see any difficulties, Belyakov said.

(Editing by Jane Merriman)