When will BHP up its bid for Potash Corp?

- August 18th, 2010

On Tuesday, Canada’s Potash Corporation received an unsolicited $38.6 billion takeover offer by BHP Billiton. The offer, the biggest of the year in any industry, was dismissed by Potash Corp as “grossly inadequate” with at least one major shareholder immediately rejecting the offer.

By Leia Michele Toovey- Exclusive to Potash Investing News

On Tuesday, Canada’s Potash Corporation (NYSE:POT) received an unsolicited $38.6 billion takeover offer by BHP Billiton (NYSE:BHP). The offer, the biggest of the year in any industry, was dismissed by Potash Corp as “grossly inadequate” with at least one major shareholder immediately rejecting the offer. The company did admit, however, that they may consider a substantially more attractive offer.

The bid proved true the rumors circulating since the start of the year that BHP would attempt to gain immediate entrance to the sector by bidding for an established producer.

BHP has already expressed interest in the Potash sector, since Marius Kloppers took the helm at BHP in 2007. The company has acquired exploration lands and submitted plans for the Jansen project, the province’s first new potash mine in 40 years. BHP hasn’t said if that project will go ahead should it acquire Potash Corp, but Potash Corp has long considered the project little more than a precursor to a bid. The Jansen project will require considerable ramp-up time, and the only way to gain immediate access to potash is an acquisition.  Commenting on BHP’s Jansen project and BHP’s real interest in Saskatchewan, Potash Corp CEO Bill Doyle added, “The Jansen project has been a smokescreen, a charade so to speak. We clearly saw through it.”

So, will BHP make another bid?  According the industry experts, the answer is a resounding yes. Earlier in the year, in response to the rumors that BHP would make a bid for Potash, Bill Doyle responded, “If someone wants to take over our company, it’s possible, but it will be expensive.” He reiterated this sentiment yesterday when he added, “I am not saying that we are opposed to a sale, but what I am saying is we are opposed to a steal of the company.”

Unfortunately for BHP the bid itself catapulted Potash stock well into positive territory, even on a day where the overall market was quiet.  On Tuesday, the bid propelled potash shares forward to close up just over 27 percent. BHP’s shares, on the other hand, lost approximately 1 percent.  Analysts have estimatedthat in order for Potash Corp to take BHP’s advances seriously, the mining mecca will have to bid in the range of $160 to $180 per share. Analysts and investment bankers said they expect BHP to make another offer. “They are certainly not going to make one offer and walk away if it’s rejected,” said Canaccord Genuity analyst Damien Hackett. Potash Corp launched a shareholders rights plan that would make it more expensive to acquire the company.

The timing of BHP’s bid, which was presented to the executives last Friday, is crucial. BHP is looking to capitalize on the resurgence of the global fertilizer sector, before the share prices of the major producers fully recover.  At this point, there is no denying that a recovery is under-way, during the first half of the year major producers posted record or near-record sales volumes.  However, total profits were lowered by the fact that the price of potash is yet to fully rebound. BHP’s bid is richer than Potash Corp’s 52-week high of $128.42, but well below the company’s all-time-high of more than $240 a share, touched in mid-2008.

Demand is lifting, and so are grain prices- a key influence into potash prices. “They’ve chosen a point where Potash Corp stocks are trading at a very low level…and grain prices globally are lifting. And with that, fertilizer demand is picking up,” said Patricia Mohr, vice-president of Scotiabank Group, an economics and commodity market specialist.

The potash sector has witnessed considerable consolidation activity in the last months. Three months ago, a year-long takeover battle involving four producers, Agrium Inc., Yara International, CF Industries and Terra Industries, culminated with CF’s acquisition of Terra. In Europe, Russia is currently working to consolidate various potash companies spread throughout the now defunct USSR. This conglomerate could become the second largest potash producer, behind Potash Corp. of Saskatchewan.

After Potash Corp’s rejection of the offer, BHP said it would review its options and make a further announcement in due course. Bank of America Merrill Lynch, Goldman Sachs and RBC Capital Markets are acting as financial advisers to Potash Corp.

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