Potash Corp. rejects BHP’s buyout bid

BHP Billiton‘s (BHP-N) unsolicited buyout offer for Potash Corporation of Saskatchewan (POT-T, POT-N) for $130 per share in cash or US$38.6 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 today.

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

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 mine off the ground at a cost of $3.5-$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 our 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. “A theoretical 30% premium to last night’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 buy-back.”

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, 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 the analysts 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 $2,250 per tonne, a level that “would value Potash Corp. at around $41 billion, or around $135 per share.” (In June BHP said the Jansen project would start production in 2015.)

If a formal 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, 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. In New York the company advanced 27.66% or US$31.02 to finish the day at US$143.17 per share.