So is the BHP Billiton thrust for control of Potash Corporation of Canada a good thing?
While it’s too early to say, some analysts say the company should walk away (as it did with Rio Tinto), if the price gets out of hand.
The key of course, is the price, the indicated offer of $US38.5 billion didn’t tempt Potash, Citibank reckons $US45 billion is tops, some London analysts say $US60 billion could be paid without cutting earnings over time.
But local investors judged it an expensive deal and wiped billions of dollars from BHP’s market value in Australia yesterday with the share price down 4.4%, or $1.78 at $38.42.
That’s around $US9 billion, a not insignificant amount, even for a company the size of BHP.
Some analysts have recalled the very expensive tilt at Alcan by Rio Tinto, but times are different to 2007 and BHP is a bigger, stronger company and has lower debt and higher cash flows than Rio did at its peak.
But for BHP, Potash Corporation is not an over-priced bid for glory in the dying days of the low cost credit boom by the management of the acquiring company wanting to make a name for themselves.
It is a bid for global leadership in this industry.
Potash has rejected as "grossly inadequate" the unsolicited takeover bid from BHP worth about $US38.49 billion ($A42.85 billion), but the deal will always come down to the right price.
BHP revealed this morning it had arranged a loan of $US45 million from a group of banks.
There are no rival suitors: Rio is out of the game, US agri-business group, Cargill, is already a player, Vale of Brazil is in the industry for national government reasons, Anglo American is not strong enough, Xstrata would not be interested, or have the financial firepower. And private equity just can’t match BHP’s strength.
A couple of years ago, when Rio was bidding for Alcan, Potash might have cost $US70 billion, but now it’s just over half that price. Potash prices crashed in the GFC and have only just started recovering.
BHP has broadened its potash mining operations in Canada over the past four years.
It bought out its Anglo Potash joint venture in Canada for $US282 million ($A313.93 million) in 2008 and purchased Athabasca Potash Inc earlier this year for about $US320 million ($A356.23 million), extending its potential exploration acreage in Canada to over 14,000 square km.
Fertilisers have been a fertile (sorry) area for takeover activity this year.
This week Canadian fertiliser company Agrium offered more than $US1 billion for AWB, a company that had already been targeted by GrainCorp. AWB has fertiliser distribution businesses in addition to its grain marketing side.
And there’s a lot of pushing and shoving in Russia as several groups attempt to unify that country’s industry.
Earlier this year, Agrium lost a $US5.5 billion hostile takeover bid for fertiliser producer CF Industries which acquired Terra Industries for $US4.7 billion in April, creating one of the world’s largest fertiliser companies.
Cargill, has controlled fertiliser maker Mosaic Co since 2004, thereby ruling that company off the BHP buy list.
Some analysts have wondered why is BHP interested in potash and fertilisers when there are other deals around.
For example, why not go to troubled BP and make it an offer for gas and LNG interests on the North West Shelf?
And the smarter analysts recall the $US3.5 billion lost by BHP in its abortive attempt to break into the lateritic nickel industry with the Ravensthorpe project in Western Australia and associated facilities in North Queensland. A total, expensive wipeout.
Potash and fertilisers are moving back into a growth phase (which local group, Incitec Pivot hopes turns into a sustained rebound).
Last month Potash Corp said in its second quarter earnings report that demand and sales rebounded in the first and second quarters of 2010 as farmers recovered their confidence from the downturn caused by the GFC, which cut farm finance and demand around the world.
“With the worst of the global recession behind us, the inevitable need for increased food production and proper fertilizer use is being re-established," said CEO Bill Doyle in the report.
“As we have stated in the past, fertilizer applications can be deferred, but cannot be ignored.
“With growing demand for food and supportive crop economics, farmers have been motivated to begin addressing nutrient deficiencies in their soils.”
Potash Corp expects global shipments of potash in 2010 will be about 50-million tonnes, with demand increasing to 55-million next year.
Late yesterday BHP revealed that it was going straight to Potash shareholders to argue its case, in other words, going hostile.
"Notwithstanding PotashCorp’s current position, BHP Billiton would welcome the opportunity to work with PotashCorp to achieve a successful outcome to this transaction," BHP Billiton said in a statement to the ASX.
"We firmly believe that PotashCorp shareholders will find the certainty of a cash offer, at a premium of 32 per cent to the 30-trading day period average, very attractive and we have therefore decided to make this offer directly to those shareholders," Mr Nasser said.
BHP Billiton said Potash would provide it with "an immediate leadership platform in the global fertiliser industry" and diversify its portfolio of large, low-cost, long-life, expandable, export-oriented `Tier 1′ assets.
BHP chief executive Marius Kloppers said. "
