PotashCorp aims to regain market influence with K+S bid

VANCOUVER — Canadian giant Potash Corp. of Saskatchewan (TSX: POT; NYSE: POT) is considering a mega deal for Germany’s K+S Aktiengesellschaft that could materially change the landscape in the fertilizer business. The world’s largest potash producer announced on June 25 that it had made a “private proposal” to K+S that sets the stage for higher-level negotiations.

With the deal, PotashCorp could reassert some of its historic dominance over the fertilizer market, since two combined companies would account for 30% of global potash production.

Also of intersest to PotashCorp is K+S’s ownership of the Legacy potash project in Saskatchewan, which it is developing for $4.1 billion. K+S reported in March that it had secured 75% of the development capital for the new mine.

Legacy could produce up to 3 million tonnes of potash annually after it hits production next year. One issue for PotashCorp is that K+S is not a member of the Canadian Potash Exporters (Canpotex) cartel, which manages much of the Saskatchewan potash industry and exports an average 9 million tonnes annually. PotashCorp accounts for the largest part of that total, with the rest divided between the other two members Mosaic (NYSE: MOS) and Agrium (TSX: AGU; NYSE: AGU).

The global potash market was pretty much a duopoly between Canpotex and the Belarusian Potash Co. (BPC), a second consortium that exported Belarusian (Belaruskali) and Russian potash (Uralkali), until the BPC marketing group fell apart two years ago. There has been speculation that Canpotex might be in danger of dissolving in the face of competing projects like Legacy and BHP Billiton’s (NYSE: BHP; LSE: BLT) large-scale Jansen mine, which is also in Saskatchewan.

“I think the answer is yes,” PotashCorp president and CEO Jochen Tilk said during a presentation in late May, when asked if Canpotex could survive if K+S operated outside the cartel.

“The question is really whether Legacy could be in Canpotex, or whether it should be independent. I can’t answer that because I can’t speak for our colleagues at K+S. Canpotex is not just an arrangement among three players. It’s got infrastructure. It owns thousands of railcars. It’s got some of the best port facilities, storage facilities — so there is a benefit. So my view is that yes it can, and I think it will. And how it will come together at the end depends very much on K+S and how that plays out,” he elaborated.

It appears that, in the end, PotashCorp doesn’t want to take the chance that such a large mine might operate outside its market influence and in its own back yard. According to analysts at Canaccord Genuity the deal could value K+S in excess of US$8.5 billion. PotashCorp could mine 9 million tonnes of potash this year, while K+S produces 3.2 million tonnes annually.

BMO Capital Markets analyst Joel Jackson wrote in a research comment that gaining control of K+S’s German assets, along with Legacy, could “give [PotashCorp] back the influence it seems to have lost.” On June 29 BMO Research reiterated a “market perform” rating on PotashCorp, along with a $35-per-share price target.

PotashCorp should be strategically positioned to fund an offer for K+S. The company recently invested $8.5 billion to expand nameplate capacity to 19 million tonnes by 2018. The company reported first-quarter earnings of $370 million, or 44¢ per share, which marks an improvement from the $340 million it registered during the same period in 2014.

Higher prices and lower per-tonne cost of goods sold in potash were the primary contributors, more than offsetting rises in Saskatchewan potash taxes and weaker nitrogen sales volumes. PotashCorp reported it saw price ranges from US$350 to US$400 per tonne potash during 2014. The company produces at US$96 per tonne.

PotashCorp has an annual estimate for gross margins ranging from $1.5 billion to $1.8 billion, on the back of sales volumes between 9.2 million and 9.7 million tonnes of potash. Shares have traded within a 52-week window of $35.24 to $47.10, and closed at $38.73 at press time for a $32.3-billion market capitalization.

Representatives from PotashCorp and K+S did not immediately respond to request for comment.