PERSPECTIVE: BHP fires $40B opening salvo in hostile takeover of PotashCorp

Potash is hot, hot, hot - both potash the indispensable commodity and Potash Corp. of Saskatchewan (PotashCorp...

Potash is hot, hot, hot - both potash the indispensable commodity and Potash Corp. of Saskatchewan (PotashCorp), that just happens to be the world's largest producer. The Canadian company has rejected a US$130/share offer from the world largest miner, Australian BHP Billiton. The bid reflects a total purchase price in the area of US$40 billion.

PotashCorp CEO Bill Doyle called the offer "grossly inadequate," and the board quickly adopted a shareholder rights plan. Doyle's opinion of the offer looks to be an understatement.

BHP's offer reflected a 16% premium in PotashCorp's share price as it traded on Aug. 16. PotashCorp shares jumped 26% the following day. The share price has been on a steady climb since it dipped to slightly below C$90 early in July. PotashCorp reported earnings of $472.0 million in Q2 2010, double the same quarter a year earlier. The gross margin for Q2 2010 was $583.6 million, three times earnings for the same period in 2009. And that is only one quarter. PotashCorp shares reached a record high of US$240 each in mid-2008 before the global financial meltdown, and the price is again headed in the desired direction.

BHP has shown growing interest in Canada's potash patch. The company is moving forward on its 100%-owned Jansen project east of Lanigan, SK. Construction could start in earnest next year for production in 2015 or 2016. The project has a target of 8.0 million t/y of saleable product at full capacity. Earlier this year BHP acquired Athabasca Potash for a modest C$341 million. That brought the Burr exploration project adjacent to the Jansen property into the BHP portfolio.

If readers will allow this writer an "I told you so" moment, here is what I wrote in October 2009 about a PotashCorp-BHP merger: "BHP Billiton should consider a takeover of PotashCorp. This was suggested by analysts at Bank of America Merrill Lynch. They speculate that the world's largest miner could take over the Canadian company at a 30% premium to the share price."

If these analysts are right, BHP (or a rival) will have to considerably up its offer to put PotashCorp management in a selling mood.

So far BHP has raied US$45 billion in loans from six international banks to pay for a takeover of PotashCorp. The cash may be tempting for PotashCorp shareholders.

There are other reasons to be bullish on potash. Demand is growing around the world, and that means increasing prices and larger shipments. The potash price has rebounded to the US$375/t-range, an improvement in the 2009 low of US$300 but far from the US$1,000/t it commanded in 2008. BHP's Jansen mine will be the first new potash producer in Saskatchewan in nearly 40 years. Potash One of Vancouver has a positive feasibility study for its Legacy solution mining project near Regina, SK. Agrium Inc. of Calgary earned US$506 million in the second quarter this year. Russian billionaire Suleiman Kerimov is attempting to consolidate several smaller producers in a bid to create a company that rivals Potash Corp. Finally, North Dakota issued its first potash exploration permit since 1976 to Dakota Salts of Denver.


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