BHP takes offer to Potash Corp. shareholders

BHP Billiton’s (BHP-N) unsolicited buyout offer for Potash Corp. of Saskatchewan (POT-T, POT-N) for US$130 per share in cash or about US$39 billion “so grossly undervalues the company” that it “was not a constructive basis for negotiation,” and “doesn’t even come close to reflecting the intrinsic value of Potash Corp.,” Bill Doyle, Potash Corp.’s president and chief executive, told investors and analysts in a conference call on Aug. 17.

“I’m not saying we’re opposed to a sale, what I’m saying is we’re opposed to a steal of the company,” Doyle said in response to a question posed by an analyst.

The takeover proposal, rejected unanimously by Potash Corp.’s board of directors, ranks as the second-largest in Canadian history, behind Rio Tinto’s (RTP-N, RIO-L) US$43-billion acquisition of Alcan in 2007.

BHP’s US$130-per-share offer (made privately on Aug. 13) represented a 16% premium over Potash Corp.’s closing share price on the New York Stock Exchange (NYSE) on Aug. 16 of US$112.15. In Toronto, Potash Corp.’s shares closed at $117.23 apiece.

A day after the first approach by BHP was made public by Potash Corp., the Australian mining giant declared that it intended to take its offer directly to Potash Corp. shareholders.

In a press release on Aug. 18, BHP noted that a US$130-per-share all-cash offer represented an “attractive 20% premium” to the Aug. 11 closing share price of Potash Corp. on the NYSE.

The offer values the total equity of Potash Corp. at about US$40 billion on a fully diluted basis.

BHP pointed out the offer was a premium of 32% and 33% to the volume-weighted average trading prices of Potash Corp. shares on the NYSE for the 30-trading day and the 60-trading day periods ended on the same date, respectively.

Bill Johnson, Potash Corp.’s director of public affairs, could not be reached by presstime for comment on BHP’s decision to take its offer directly to shareholders.

But in the recent conference call, Doyle charged that the timing of the bid was “highly opportunistic and an ill-disguised attempt to exploit an anomaly in the equity market valuation of Potash Corp.,” and argued that BHP had “intentionally launched its proposal just as the fertilizer industry emerges from an unprecedented demand decline associated with the global downturn in order to seize the value that Potash Corp. is poised to create for its shareholders.” (In mid-2008, Potash Corp. was trading in Toronto at $236.57 per share.)

He also noted that the market for potash was on the verge of an “inflection point” and argued that a return to historical trend-line growth by 2011 would bring about a tightening in potash supply and higher prices.

In addition, Doyle maintained that the proposal did not reflect the scarcity value of the company, which is the number one producer of potash in the world (20% of the world’s capacity), nor the fact that it takes at least seven years to get a greenfield potash project into production at a cost of between $3.5 billion and $5 billion.

Potash Corp. has adopted a shareholder rights plan to help fend off a hostile takeover, a move Doyle described as “a very prudent course to protect shareholders.”

Some analysts believe that a higher offer could be in the cards.

“This could be a long battle with a higher offer likely to emerge,” P.J. Juvekar, an analyst at Citi Investment Research, wrote in a note to clients about Potash Corp. on Aug. 17. “A theoretical 30% premium to Aug. 16’s close (in line with average M&A premiums paid in the sector over the last five years) would place POT shares at $146 per share. Our metals and mining team estimates BHP would be able to fund this out of debt and potentially also do a buyback.”

Citi Investment Research’s metals and mining team also ruled out a competing bid from Vale (VALE-N), calling it “unlikely,” because the Brazilian mining giant “cannot finance a bid of $40 billion plus without a huge equity component” and because it has “meaningful capex requirements,” Juvekar wrote.

In a separate note on BHP Billiton on Aug. 17, Citi Investment Research analysts Heath Jansen, Clarke Wilkins and Johann Pretorius argued that in their opinion BHP would be better off walking away from the offer because “the cost of obtaining a friendly deal that would be needed to gain approval, given POT’s shareholder rights plan, looks too high.

“BHP Billiton would gain more long-term value by buying back its own shares or continuing to develop the Jansen potash project,” the analysts added. “If BHP Billiton lifts its offer price beyond a 30% premium, we would view this as a negative.”

While they conceded that BHP would be “buying into a structurally sound commodity market,” they also argued that buying POT would result in “over 30% of the company’s earnings coming from potash and oil, meaning investors may look to own other companies to gain pure metals and mining exposure.”

In addition, they calculated that the cost of building Jansen would be about US$2,250 per tonne, a level that “would value Potash Corp. at around US$41 billion, or around US$135 per share.” (In June, BHP said the Jansen project would start production in 2015.)

If a takeover offer were to succeed, it would also need Canadian regulatory approval, “which could be a significant hurdle,” Citi Investment Research analysts noted, although they pointed out that Rio Tinto was successful in its acquisition of Alcan.

In a note to clients on Aug. 17, UBS Investment Research called the bid a “surprise move” given “BHP Billiton has said that they see value in Build versus Buy when it comes to the potash industry. Also with US$21 billion of capex over the next 12 months, we thought that BHP would be happy to stick to that for now.”

In Toronto, Potash Corp. closed up $30.11 or 25.68% at $147.34 per share on Aug. 17. In New York, the company advanced 27.66% or US$31.02 to US$143.17.