BHP's Fresh Offer in line - Analyst Blog

Following the rejection of the buy-out offer made by the Australian mining giant, BHP Billiton Ltd. (BHP) for Canada's Potash Corp. of Saskatchewan Inc. (POT), the world's biggest fertilizer manufacturer for $38.56 in total or $130 per share, we believe that BHP will increase its offer price beyond $150 per share.

 

It is an all-cash offer at $130 per share. However, the shareholders of Potash have rejected the offer terming it as grossly inadequate. They believe that 16% premium over the August 16 closing price of $112.15 is an undervaluation in terms of the company’s global operating capacity and growing market demand. Thus, BHP will review its options and make further announcements in the fullness of time.

 

Following the rejection of the offer, the share price of Potash grew approximately 32.0% while that of BHP slipped 5.2%.

 

This will be the first major acquisition by BHP in recent times, should it happen. However, the company has entered into various joint ventures earlier. The latest being the one with Rio Tinto (RTP) in December 2009 to establish the Western Australia Iron Ore Production facility. The agreement is a milestone in delivering significant additional value to the shareholders.

 

Further, the company maintains a progressive dividend policy with a dividend of $0.42 per share in the first half of fiscal 2010, up from $0.41 in the first half of fiscal 2009. In fiscal 2009, dividend was $0.82, an increase of 17.1% year over year. A continuous growth in dividend also raises shareholder value that inspires our optimism about the stock.

 

However, BHP faces foreign currency risks as the majority of its income is generated from international operations. Thus, over the longer term we maintain our Neutral recommendation. The stock currently retains a Zacks #4 Rank (short-term Sell rating).