Moody's React to Fertilizer Buzz - Analyst Blog

Ratings agency Moody's Investors Service, an affiliate of Moody's Corporation (MCO) has recently confirmed its 'Baa1' senior secured ratings on Potash Corporation of Saskatchewan (POT) and downgraded its outlook to "Developing" from "Stable", stated Reuters. Moody's 'Baa' rating is a medium grade rating that indicates moderate credit risk. The ratings change came in just after the fertilizer company rebuffed a hostile acquisition offer from Australian mining giant BHP Billiton Limited (BHP). We believe the rating agency's major concern is the uncertain offer price.

On Aug 15, 2010, Potash Corp turned down BHP's $38.6 billion (all in cash) offer citing that the offer grossly undervalues the company and its future growth prospects. Potash Corp. stated that at $130 per share, BHP Billiton's acquisition proposal reflects a modest premium of 16% on the stock's closing price of $112.15 as on August 16, 2010. Furthermore, the premium offered is inferior to the average control premiums offered globally and in Canada.

However, BHP Billiton, which would become the world's largest fertilizer company post acquisition, argues that the offer is in the best interest of Potash Corp's shareholders as it represents a 20% premium over the stock's closing price as of Aug 11, 2010. It also reflects a 32% premium to the volume weighted average trading prices of Potash Corp's shares for the 30 trading day period.

BHP remains committed to acquire Potash Corp. The company now intends to come up with a better bid. Meanwhile, Potash Corp is seeking alternate proposals to make things more challenging for BHP.

Rumors are rife that Moody's Investor Services would also review and possibly downgrade BHP's long-term A1 debt ratings in the event of the merger taking place and funded via new debt, which would leverage the company's balance sheet. Moody judges the obligations rated A as "upper-medium grade", subject to "low credit risk", but are susceptible to impairment over the long term.

Potash Corporation of Saskatchewan Inc., a Canadian corporation based in Saskatoon, Saskatchewan, is the world's largest fertilizer enterprise producing three primary plant nutrients- potash, phosphate and nitrogen. It also controls 55% of the world's (and 70% of North America's) potash supply.

We believe at the current price, BHP's offer significantly undervalues Potash Corp. BHP Billiton's current offer of $130 per share is substantially below Potash Corp.'s 52 week high of $144.40 as reached on Aug 17, 2010.

Given Potash Corp.'s strong strategic investments and an optimistic demand outlook for fertilizers, we think the deal is less lucrative at $130 per share.

Currently, Potash Corp. has a short-term (1 to 3 months) Zacks #3 Rank ('Hold') and a long-term (6+ months) Neutral recommendation.

 
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