Not any more

BHP goes hostile on $39B Potash Corp bid

In Canada on August 18, 2010 at 08:52

MELBOURNE/NEW YORK —BHP Billiton, the world’s biggest miner, launched a hostile $38.6-billion bid for Potash Corp after the Canadian fertilizer group’s board rejected this year’s biggest takeover offer.

BHP Billiton said on Wednesday it was making its $130 a share offer directly to shareholders, bypassing Potash Corp’s board which a day earlier called the bid "grossly inadequate."

Investors and analysts expect BHP to have to raise its offer after Potash Corp shares jumped a record 27% to $143 a share on Tuesday, 10% above the bid price.

"Everyone’s saying they’ll have to pay more," said Tom Elliott, Managing Director of MM&E Capital based in Melbourne, a hedge fund that takes positions in M&A situations.

The Anglo-Australian miner, sitting on an estimated $11 billion cash pile, is looking to capitalize on a resurgence of the global fertilizer industry.

BHP wants to become the largest fertilizer supplier to a world where survival means more farm production and China’s voracious appetite for commodities is expected to grow.

"(This deal) further diversifies our footprint by customer, by geography and by commodity," BHP Chief Executive Marius Kloppers said on a conference call. "We are driven by a belief that potash mining has good long term industry fundamentals."

Potash is the common name for various compounds containing potassium, which are used mainly as fertilizers.

BHP said it expected a deal to add to earnings in the second full fiscal year after completion and had arranged financing. It put total funds required for the deal at $43 billion, including options and pension obligations.

Ahead of the announcement, BHP Australian shares closed down 4.4% at A$38.42 and the cost of insuring its debt rose on concerns the miner may be forced to raise its offer to win over shareholders. BHP’s London shares fell about 1 percent.

Potash Corp of Saskatchewan shares in New York jumped 28% to $143.17 on Tuesday, but still well short of its all-time high above $241 in 2008.

One fund manager at a Japanese institution that holds both Potash Corp and BHP shares said a bid just above Potash Corp’s current price might be successful.

"Looking at the past, $146 will be appropriate. I feel anything above the level would make it difficult to win support from shareholders of BHP," the fund manager said, on condition of anonymity.

Another Asian institutional investor in Potash said he expected a bid of $160 a share to be successful.

BHP Billiton has long been interested in expanding into potash for its next spurt of growth, but investors had expected it to focus on growing its own assets, including the Jansen potash deposit in Canada.

While expecting BHP to raise its bid bankers, analysts and investors said BHP was unlikely to face any rival bidders, so the Potash Corp board may find it difficult to push BHP too hard.

Obvious potential contenders, Rio Tinto and Brazil’s Vale, were both seen as unlikely to take on BHP in a bidding war.

Rio has only recently sold off potash assets in Argentina and Canada to help pay down a mountain of debt it took on for its ill-timed takeover of Alcan, and it has committed to spend $13 billion on development projects in the next 18 months.

Vale would be more likely to wait to pick up any potash assets BHP might be forced to spin off after taking over Potash, one analyst said.

Potash fits with BHP’s strategy of chasing large, low-cost, expandable, exportable commodities, and has the added advantage of being a market controlled by only a few major players. It also has a huge potential market in China, already BHP’s biggest customer.

"China consumes half the commodities in the world, more or less. A market like potash where their consumption is yet to seriously pick up is one you’d want to get into," an analyst in Sydney said on condition of anonymity.

Not all BHP shareholders were sanguine about the offer.

"We’re surprised at the multiple that they’re prepared to pay for Potash Corp," said James Bruce, a portfolio manager at Perpetual Investments, which owns BHP shares.

At $130 the bid would be worth 17.1 times forecast earnings for 2011, compared with BHP, trading on a multiple of 11.4, and Potash rival Mosaic Co, on a multiple of 14.8.

"At $130 it would be a great deal. If they get it at $150 it’s a decent deal, and it’s a strategic deal," said an analyst who declined to be identified, adding that BHP may have to offer at least $170 a share to get Potash’s board interested.

BHP should have no problem paying for the deal out of cash and debt. As of June, analysts estimate it had more than $11 billion in cash on hand, with a gearing of around 16%.

Moody’s Investor Services said an offer could affect BHP’s credit rating.

"If a formal takeover offer is made, and predicated upon substantial debt raising, the long-term A1 ratings of BHP Billiton entities are likely to be placed on review for possible downgrade," said Terry Fanous, Moody’s senior vice president. Potash Corp has left the door ajar, saying it might consider a more attractive proposition.

BHP’s Kloppers has a reputation for not paying too much, after deciding to walk away in 2008 following a year-long campaign to take over Rio Tinto.

"The organization (BHP Billiton) has exhibited a very disciplined approach to M&A activity historically," said Tim Schroeders, a portfolio manager at Pengana Capital, also a BHP shareholder.

Five-year credit-default swaps on BHP Billiton’s debt have widened by 13 basis points since Tuesday and were quoted at 87-90 points, according to a trader at a European bank.

BHP is being advised by JPMorgan, while Potash Corp is being advised by BofA Merrill Lynch, Goldman Sachs and RBC Capital Markets. The deal could yield potential fees of $170-$190 million to advisors, according to Thomson Reuters data.

© Thomson Reuters 2010

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