K+S Shares Up 30 Percent on PotashCorp Takeover Offer

In a brief press release put out Thursday, Potash Corporation of Saskatchewan (PotashCorp) (TSX:POT,NYSE:POT) has confirmed that it has made a friendly proposal to negotiate terms to acquire Germany’s K+S Aktiengesellschaft (FWB:SDF1). The company stated that it does not intend to provide further comment on the matter until it is appropriate to do so, or until a formal agreement has been reached.

If a deal is eventually negotiated and completed, the acquisition would certainly be a major one for the potash space. PotashCorp is the largest fertilizer company by capacity, while K+S is the largest potash producer in Europe. Credit Suisse told the Financial Times that a combination of the two companies would control 20 to 25 percent of global potash supply by 2020.

Reuters also noted that an acquisition by PotashCorp would make K+S the first German blue-chip stock to be bought by a foreign company in over a decade, and that such a deal would be the the largest global potash merger since Urakali acquired Silvinit in 2011.

Still, the potash space has become more a lot more competitive since Russia’s Uralkali broke up a potash production cartel in 2013, and as with the rest of the mining space, it might take a bit more out of the box thinking to survive. According to the Times, analysts at Liberum pegged PotashCorp’s takeover approach as a defensive move.

K+S’s massive Legacy project in Canada is set to go into production next year, and the new operation could pose a “disruptive risk to industry pricing discipline,” the firm said. K+S already owns 5 potash mines in Saskatchewan, and Legacy would be the first greenfield potash mine to be built in the province in nearly 40 years, a report from Bloomberg stated.

Alternatively, John Goldsmith, vice president of Potash shareholder Montrusco Bolton told Reuters that the approach could be aimed at guarding against another bid from BHP Billiton (NYSE:BHP) who tried to takeover PotashCorp in 2010. “When one of the lowest-cost producers is buying a higher-cost producer, it doesn’t make a lot of sense,” he told the news outlet. “Ultimately, this is possibly a way to stave off a second BHP bid.”

Beyond that, an acquisition of K+S would, of course, give PotashCorp substantial assets in Europe.

The market appears to have reacted well to news of a possible deal, at least for K+S. Shares of that company jumped 30 percent on the Frankfurt stock exchange to $18.84 during Friday trading hours. Meanwhile, shares of PotashCorp were down about 2 percent on the Toronto and New York stock exchanges.

However, a report from Reuters suggests that the German potash supplier is likely to reject PotashCorp’s proposal. While PotashCorp is said to have made an offer worth 41 euros per share, two sources told the news outlet that K+S would see the proposal as too low. Bloomberg stated that K+S is still evaluating the offer and has not made a formal decision.

For now, potash investors will have to keep watching for more news from the companies.

Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.

Related reading:

10 Top Potash-producing Countries

Saskatchewan Government Increases Potash Tax; PotashCorp Responds