Potash Discards BHP's Offer - Analyst Blog

Shares of Potash Corporation of Saskatchewan Inc. (POT), the world’s largest fertilizer company by capacity, shot up 28% and closed at $143.17 on August 17, 2010 after rebuffed mining giant BHP Billiton Ltd’s (BHP) hostile acquisition proposal. It was a $38.6 billion (all in cash) offer, which Potash turned down, citing that the offer grossly undervalues the company and its future growth prospects.

 

The fertilizer industry is witnessing a consolidation phase with a steady rise in demand for crop nutrients like potash over the past year. The Potash-BHP Billiton saga comes in just after the year-long take over battle between three North American fertilizer producers:  Agrium Inc. (AGU), CF Industries (CF) and Terra Industries (TRA), which with CF acquiring Terra.

 

 

BHP Billiton, the world’s largest mining company, 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 August 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. Post merger, the Australian miner would become the world's largest fertilizer company. BHP Billiton has requested for a response from Potash Corp by August 18, 2010.

 

Moody's Investor Services, an affiliate of credit rating agency, Moody’s Corporation (MCO), will review BHP Billiton’s long-term debt ratings, which could see a downgrade if the company funds the proposed acquisition through loans and leverages its balance sheet. Moody judges obligations rated A as "upper-medium grade", subject to "low credit risk", but are susceptible to impairment over the long term.

 

 

Potash Corp. states that at $130 per share, BHP Billiton’s acquisition proposal reflects a modest premium of 16% over the stock’s closing price of $112.15 on August 16, 2010. Furthermore, the premium offered is inferior to the average control premiums offered globally and in Canada.

 

Potash Corp is optimistic on the improving fertilizer industry. The company foresees higher demand for potash and believes that its growing potash capacity should suffice for this surge in demand. Potash Corp. strongly feels that BHP Billiton’s proposal substantially undervalues its recent and ongoing investments to increase potash capacity, the value of its strategic equity investments in China, Chile, Jordan and Israel, and its ability to meet the North American potash demand.

 

To combat the takeover, Potash Corp. has embarked upon a shareholder rights plan, which would prevent any company from buying up more than a 20% stake in Potash. Issuing of the right would enable shareholders to buy one additional share at a discount for each that they already owned as of August 16, 2010. This would make the acquisition more expensive for the bidder.

 

 

The 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. During the 1990s, Potash Corp. expanded by buying up a number of American potash companies, including the Potash Company of America, Florida Favorite Fertilizer, Texasgulf and Arcadian Corporation. It is by far the world's largest producer of potash, representing about 17% of the global production and 22% of the global potash capacity (and 55% of North America). It also controls 55% of the world's (and 70% of North America's) unused supply, and for long has deliberately held back production to keep potash prices high. Potash is produced by 6 mines in Saskatchewan and 1 in New Brunswick.

 

 

Potash Corp. plans to enhance potash production capacity to 17.1 million tons by 2015, which should cost over $6.75 billion (CDN $7 billion). The company’s Cory project in Canada will operate with an initial annual capacity of 800,000 tons where the company plans to ramp up capacity to 3 million tons. The project is 83% complete and is scheduled to be over by the end of 2010. Potash Corp. is also expanding operations in the New Brunswick plant by 2 million tons per year by the end of the fourth quarter of 2011. The Rocanville, Saskatchewan plant would add another 2.7 million tons and raise the facility’s annual capacity to 5.7 million tons. Construction of the mill is scheduled for completion by the end of 2012 with ramp-up over the following 2 years.

 

In July 2008, Potash Corp. also announced a de-bottlenecking project at the Allan, Saskatchewan operation, which will add 1 million tons of annual production capacity and raise its annual capacity to 3 million tons per year by the end of 2012. The increase in potash supply will be realized gradually over the next 4 years, capturing a significant share of the growth in global demand. The company expects China and India to drive its global potash shipments by about 5%. 

 

We believe Potash Corp.’s rejection is pertinent as BHP Billiton’s current offer of $130 per share is significantly below Potash Corp.’s 52 week high of $144.40 as reached on August 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. is a short-term (1 to 3 months) Zacks #3 Rank ('Hold') and a long-term (6+ months) Neutral recommendation.