BHP’s Potash bid seen as long-term positive

By Steven Scheer

JERUSALEM (BestGrowthStock) – BHP Billiton’s bid to take over Potash Corp has already pepped up shares in rival potash companies and could prove a longer-term positive for the sector, according to industry watchers.

BHP went hostile with its $39 billion bid on Wednesday in a move which could lead to higher company valuations across the board, as well as underpinning the price of fertilizers of which potash is a constituent.

Potash prices fell over the past year to $350-$390 per ton but BHP’s interest in Potash Corp is at least a sign of confidence in future pricing of its key product.

“Consolidation in general is good because there is more power for suppliers,” said Limor Gruber, an analyst at brokerage Psagot in Tel Aviv.

“Pricing for the sector is going up. Obviously, it will need to be justified by rising prices of fertilizer,” she said. “But it values potash activity in a new way for now.”

Eight companies control more than 80 percent of global supply: Mosaic Co, Agrium Inc, K+S, Uralkali, Silvinit, Belaruskali, and Israel Chemicals (ICL) as well as Potash Corp.

CHANGE OF DYNAMICS

Many analysts believe Anglo-Australian BHP Billiton will ultimately succeed in acquiring Potash at a far higher cost.

Sophie Jourdier at Citi said in a client note the deal to buy the world’s largest fertilizer maker would “change potash industry dynamics.”

“On the positive side, it is likely that BHP would delay current plans to develop its Jansen potash deposits in Canada,” she wrote. “On the negative side, BHP may take less of a leadership position in price discipline within the industry.”

Not developing Jansen and instead buying into the potash industry would mean an estimated 8 million tons less of potash production, which would likely lead to prices rising to about $430 per ton sometime in 2011, analysts said.

Further consolidation in the sector is not likely, they added, although multiples for the largest companies should rise.

Germany’s K&S is viewed by some analysts as an unattractive takeover candidate, partly due to low exposure to the growth markets of India and China.

WestLB analyst Wolfgang Fickus said K&S also has a limited potash production capacity, limited potash resources and stricter environmental obligations compared with its peers that would lead to a rise in capital spending in upcoming years.

Still, Fickus raised K&S to “neutral” from “reduce.”

“This (Potash deal) could be the biggest acquisition in the world this year, so there’s no doubt that the focus (on the sector) will become much bigger,” said Henrik Sinding, an analyst covering Yara at brokerage Carnegie. Yara, Sinding said, could rise to a multiple of 13 to 14 times earnings from 11 percent.

Yara, though, as a global leader in nitrogen fertilizers, is unlikely to be interest to a mining company since nitrogen is not a mined product, said Jourdier.

Israel Chemicals, too, could be difficult to buy. Israel’s government owns a golden share and Potash Corp holds 13.9 percent. Even if the state allows Potash or any other company to raise its stake, Israel Corp — controlled by the Ofer family — owns 52.4 percent and may be reluctant to sell.

“The Ofers really need Israel Chemicals,” said UBS analyst Roni Biron. “Israel Corp views Israel Chemicals as a very strategic asset which finances its other key holdings.”

(Additional reporting by Camilla Knudsen, Josephine Cox and Richard Solem; Editing by David Holmes)

BHP’s Potash bid seen as long-term positive