PotashCorp shareholders may soon warm up to BHP’s bid – analysts

18 August 2010 21:31  [Source: ICIS news]

TORONTO (ICIS)--A possible lack of viable rival bids and fears of a double-dip global recession may soon warm Potash Corporation of Saskatchewan (PotashCorp) shareholders to BHP's hostile takeover bid, analysts said on Wednesday.

BHP Billiton earlier on Wednesday announced it would proceed with its takeover bid, offering $130/share or roughly $40bn (€31bn) in total, after PotashCorp’s management on Tuesday rejected BHP’s initial offer as “grossly inadequate”. 

Charles Kernot, director of metals and mining at UK-based Evolution Securities, said hopes that a Chinese state-backed firm would muster a counter-bid and further drive up PotashCorp’s share price in a bidding contest may be misplaced.

While potash supplies were a key priority of China, a Chinese state-backed firm would not be able to quickly obtain relevant regulatory approval to spend $40bn outside the country, he said.

Meanwhile, Brazil’s Vale was an unlikely bidder as it was tied up in other big projects, Kernot said. 

“It really comes down to a battle between BHP and the PotashCorp shareholder,” he said in a televised briefing on Canadian business TV.

“It is up to the Potash shareholders to decide whether a $130/share is enough today, or if they really think they can hold out for a little bid more,” he added.

Kernot said BHP might raise its bid to $150-$165/share, but not to $200/share, as some analysts have speculated.

One difficulty for BHP in properly targeting its bid price was that it had not yet been able to review PotashCorp’s contracts and arrangements with the Canpotex potash exports cartel, which includes PotashCorp as the world's largest potash fertilizer company, along with Agrium and Mosaic, Kernot said.

“If they [BHP] could sit down with PotashCorp’s management to discuss this [Canpotex] on a more open basis, they [BHP] might well be persuaded to offer a higher price,” he said.

BHP, for its part, preferred short-term pricing arrangements for its commodity sales, and it would likely pursue a short-term pricing model in potash as well, if its bid succeeded, he added.

PotashCorp shareholders, for their part, needed to bear in mind the ongoing fears about a a possible double-dip recession, which would hit global potash prices.

As such, BHP’s current offer may be relatively attractive, especially when one considered that PotashCorp’s shares not too long ago traded at under $100/share, Kernot said.

Kernot also said that BHP chief executive Marius Kloppers was likely to be a persistent bidder, given that his earlier attempt to merge BHP with rival Rio Tinto had failed.

“A lot is riding on this [Potash bid] for him, and he does need to be successful,” Kernot said.

Under Kloppers, BHP already had invested heavily in the potash industry, including investments in Canada’s Saskatchewan province, he added.

Bill Harris, a portfolio manager and partner at Toronto-based Avenue Investment, said that aside from BHP there seemed to be few companies able to quickly mount a rival bid.

Given the sharp rise in PotashCorp’s shares since BHP’s offer on Tuesday and a risk that a deal may yet be blocked by regulators, existing shareholders might want to start selling some of their shares to cash, Harris said.

The views of Kernot and Harris contrasted with those of other Canadian analysts who expected rival bids to come forward as BHP’s bid was too low, they said.

In related news, Toronto-based TD Newcrest bank said it raised its 12-month price target for the shares of Canadian fertilizer firm Agrium to $95, from $76, as Agrium seemed undervalued in the wake of BHP’s bid.

TD added it supported Agrium’s own bid this week to acquire Australian agricultural retailer AWB.

That deal would further diversify Agrium’s business model at a low political risk, it said in a research note.

PotashCorp’s shares were trading up 3.44% at $148.10 in New York at 15:40 hours Eastern Daylight Time 19:40 hours GMT), after jumping 31% on Tuesday when BHP's bid was disclosed.

Agrium’s shares were up 1.39% at $69.85 in New York at 15:40 Eastern Daylight Time.

($1 = €0.78)

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By: Stefan Baumgarten
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