Potash formally rejects BHP's "low ball" offer, seeks out white knight

The world's largest fertilizer Potash Corp. of Saskatchewan (NYSE.POT) officially rejected Australian mining giant BHP Billiton's (NYSE.BHP) $38.6 billion takeover bid, Monday, as it expects "superior offers or other alternatives" to emerge.

Last week, BHP made an unsolicited bid of $38.6 billion, offering to buy Potash for $130 per share. Potash, however, rejected the offer, saying it was "grossly inadequate" and undervalued its assets.
BHP, unfazed, turned hostile and took its offer directly to Potash's shareholders by placing advertisements for a tender offer that would run till October 19.
Meanwhile, Potash put in place a shareholder rights plan – commonly known as a poison pill – to protect itself from BHP's "unsolicited" interest and advised its shareholders not to act on BHP's bid until it proposed a recommendation.

Potash CEO Bill Doyle, who stands to make nearly $400 million from stock options if BHP ends up buying Potash, said Potash's board is not opposed to a sale but it is opposed "to a steal" of the company.

According to Doyle, BHP is being opportunistic and trying to buy Potash when the shares of fertilizer producers are trading low.

Doyle said the fertilizer industry is going through a downturn as farmers hit by the recession are scrimping on their spending. However, the fertilizer industry is poised for a cyclical recovery because while farmers can get away with the practice of not using fertilizers for one or two growing seasons, crop yields decline sharply after that as the soil becomes depleted of nutrients.

The International Fertilizer Industry Association also predicts that global demand for fertilizer in 2010-11 will rise by 4.8 percent to 170.4 million metric tons as rising standards of living and development in China and India are also putting increasing pressure on farmers to produce more crops from a declining amount of farmland. For instance, China has 20 percent of the world's population but just 6 percent of its arable land, which is dwindling further on account of pollution and heavy industrialization.
Rising food demand and adverse weather have already driven up the prices for corn, soybeans and wheat by as much as 40 percent since June, and potash consumption is seen rising by at least 10 percent over the next year.

Not surprisingly, Potash formally rejected BHP's bid on Monday.
"The Potash Corp. board of directors is unanimous in its belief that the BHP Billiton offer substantially undervalues Potash Corp. and fails to reflect both the value of our premier position in a strategically vital industry and our unparalleled future growth prospects," Doyle said in a statement.
"The bottom line is value," Doyle said on Monday. "No one thinks the low ball bid of $130 has any traction whatsoever."
Potash also said it has been approached by several other parties interested in buying its assets.
"Potash Corp has been approached by, and has initiated contact with, a number of third parties who have expressed an interest in considering alternative transactions," the company said in a statement on Monday.
"Discussions are being pursued with several of these third parties in order to generate value enhancing alternatives," the company said.
But finding a "white knight" may not be easy, market analysts said.

According to the analysts, Vale SA of Brazil, the Anglo-Australian Rio Tinto Group and China's energy and chemicals group Sinochem as well as a consortium led by Chinese private equity fund Hopu Investment Management, all of whom have interest in securing supply of potash, a vital crop nutrient used to help boost crop yields by improving the ability of plants to withstand dry soil, could emerge as potential bidders.
However, among them, state-run Sinochem is the likely favorite to challenge BHP as Potash owns 22 percent stake in its subsidiary Sinofert Holdings, China's top potash producer and fertilizer importer.

Sinochem spokesman Li Qiang said the company would "pay close attention" to BHP's offer and did not rule out a counter bid as Sinochem is "interested in overseas potash investment opportunities."
In case Sinochem, which reported revenues of $39 billion in 2009, makes a counter offer, a bidding war may erupt driving up the price of Potash to as much as $60 billion.

But it is doubtful whether Sinochem will be able to keep up with BHP in the bidding war. BHP has already asked a syndicate of banks - Barclays Capital, BNP Paribas, JP Morgan, Royal Bank of Scotland and Santander - to arrange a $45 billion loan to facilitate Potash's takeover.
However, if Sinochem is backed by China's $300 billion sovereign wealth fund, China Investment Corp. (CIC), it would have enough firepower to counter BHP's bid. China has a major interest in securing potash reserves as China, the second biggest importer of potash after India, fears that a BHP-Potash deal could give BHP more control over potash prices.

"The growth of China's potash demand in the long run will exceed the expansion of its own production," said Beijing Orient Agribusiness Consultant Co. analyst Xu Hongzhi. "China has tried to invest in potash mines in other countries but the record doesn't show much success."

"China has been acquiring production across a number of commodity classes," Macquarie analysts led by Duncan McKeen wrote in an August 17 research note. "Given that it is still a large net importer of potash, it may be a logical buyer of potash production."

Agrees Philip Keevil, senior partner at Compass Advisers LLP. According to Keevil, if the Chinese government "wants to get behind Sinochem, then they can blow BHP out of the water."
Meanwhile, analysts also claim it is also doubtful whether BHP will be willing to be drawn into a bidding war if the price goes past $150 per share.

According to Deutsche Bank analysts, BHP's net debt will be $47 billion at the end of 2011 if the deal is done at the current price and $53 billion if the bid is lifted to $150 a share.
Though a BHP-Potash deal will leave the new entity with no serious contender in the fertilizer sector, "there are risks involved and they (BHP Billiton) would be taking on a lot of debt," Mine Life analyst Gavin Wendt said.

Agrees Paul Xiradis, chief executive of fund manager Ausbil Dexia. According to Xiradis, though Potash is a good buy, it is unlikely whether BHP will be drawn into a bidding war.
"I'm sure that there will be a limit on how far BHP will take this, because while it will be very attractive for the longer term, they don't want to destroy that long-term prospect by overpaying," he said.
A case that comes to mind is Rio Tinto's $38 billion acquisition of aluminum producer Alcan in 2007. After Rio bought Alcan, price of the metal fell sharply and Rio became mired in a massive debt that left it crippled for years.

"There will be a point where they will have to walk away if they don't achieve it," Xiradis said.
Potash is being advised by Goldman Sachs, RBC Capital Markets and BofA Merrill Lynch while XYZ are advising BHP.

Shares of US-listed BHP, which is expected to report a profit of about $12.6 billion, a jump on last year's $10.7 billion on Wednesday when it announces its latest quarterly earnings, closed down 0.46 percent at $67.13. Shares of Potash closed up 0.35 percent at $150.20.