Potash Corp. declines comment on Israel Chemical

In a letter  to the Tel Aviv Stock Exchange, Israel Corporation, the parent company of Israel Chemical, said Potash Corporation of Saskatchewan (POT-T, POT-N) has held talks with the Israeli Government about raising its stake in the company.

Potash Corporation, which currently owns 13.84% of Israel Chemical, acknowledged the Oct. 31 letter in a brief press release, but refused to comment further. Jacob Bout of CIBC World Markets said he doesn’t understand why Israel Corporation reported the news to the Tel Aviv Stock Exchange yesterday, given that Potash Corp. held discussions with the Israeli government back in September. But he speculated that it might have been a way for the Israeli company to take the pulse of public opinion before upcoming elections in the country in January.

Bout believes resource nationalism will be a major obstacle to any deal, however, and that political hurdles will be simply too high. “The reason the transaction is politically sensitive is that Israel does not have much in the way of natural resources other than potash, sand and offshore natural gas,” he explains in a research note. “Politicians are sensitive to the optics of selling control of a company that profits from such a valuable domestic resource.” He notes that ICL potash accounts for about 9% of the world’s potash supply.

If eventually a deal were to go ahead, however, Bout says Potash Corp. would benefit from gaining control over a low-cost source of potash. He estimates unit costs would be US$90 per tonne FOB port, “well below Saskatchewan mines.” He also notes that ICL has about six million tonnes of potash capacity in the Dead Sea, which would give Potash Corp. a “larger share of global capacity and would help in the role as a swing producer, matching supply with demand.”

“Depending on the transaction premium,” he adds, “we believe Israel Corporation is likely to favour the deal as it will become the largest shareholder in Potash Corp. (about 16%, assuming a 20% premium) and shift the political headache of managing the Dead Sea asset to Potash Corp.”

Dave Kaiser of Canaccord Genuity comments in a morning note that ICL has a market capitalization of about $15.7 billion and is 53% owned by Israel Corp., which was formally state-owned, “hence the discussion with the government regarding a takeover.”

Potash Corp. owns 13.84% of ICL and “has long stated that this is not meant for investment purposes but for the purpose of eventually acquiring the company,” Kaiser continues. “Last June, it was announced that Potash Corp. was attempting to buy a further 25% of ICL, but the government was taking too long to review and as a result, Potash Corp. ended the discussions.”

Whether such a deal is in the works or even possible remains to be seen. But Kaiser points out that the timing for Potash Corp. might be right. The company’s “multi-year, multi-billion dollar capacity expansion is coming to an end,” he points out, and management may now feel “more comfortable going after a large acquisition today than they were over the past few years while they were in the midst of the large capex program.”