Scenarios: What could happen to Potash Corp

TORONTO/NEW YORK (BestGrowthStock) -Anglo-Australian miner BHP Billiton wants to buy Canada’s Potash Corp for $38.6 billion, but the world’s largest fertilizer maker has rejected the offer. With a hostile takeover battle looming and the possibility of competing bids, here are some scenarios that might play out.


BHP persists with its $130 a share hostile bid and hopes Potash Corp shareholders will be convinced of the bid’s merits. Potash Corp for its part sticks with its “just say no” defense.

“If the pitch that they’ve put on this continues, I think there is a strong likelihood that Potash Corp will be able to fend this off,” said one banker who is not in on the deal.

If BHP raises its bid, but still can’t win over Potash Corp’s board, it may again take its higher bid directly to shareholders.

“They are certainly not going to make one offer and walk away if it’s rejected,” said Canaccord Genuity analyst Damien Hackett. “There probably will be another offer, but what you can expect is that BHP will be very prudent … They are a very well-disciplined group and are not going to throw cash away.”


Potash looks for a competing bidder to beat out BHP’s bid. This bidder could be a global miner, a global food player, a Chinese entity, or a consortium of any of the above with financial players.

Analysts and investment bankers said that of the global miners, only Rio Tinto and Brazil’s Vale are big enough to consider bids on their own.

Vale has said it is not planning a bid for the company. It already has some potash assets, and is under heavy political pressure to invest in Brazil.

Rio Tinto is also viewed as being a long-shot bidder. It recently sold potash assets and is still recovering from its ill-timed $38 billion takeover of Canadian aluminum group Alcan at the top of the commodities cycle in 2007.

A source close to the matter has told Reuters that China’s Sinochem has had discussions with Potash Corp. But some analysts believe the Canadian government may frown upon a full takeover by a Chinese-controlled company.

A consortium that includes the above-mentioned companies, financial players, other fertilizer companies such as Mosaic or Agrium may mull a possible bid.

But these companies would need to raise cash for a bid and would need to contend with a single, strong bidder in BHP, which already has committed financing.


Potash Corp could foil BHP’s takeover attempt by selling a portion of its assets into a joint venture at a price that implies a substantially higher value for the whole company than BHP’s current bid.

Sinochem, China’s top fertilizer maker and its No. 4 oil company, is seen as a likely joint-venture partner, especially given that regulators are expected to take a tough stance if a Chinese entity bids to acquire the whole company.

China’s interest in Potash Corp is considerable, given the company’s No. 1 position in the sector and the fact that China is typically the world’s largest importer of the nutrient.

“If BHP, which is infamous for monopoly, buys Potash Corp, it will make the pricing system worse for consumers,” an official with a Chinese compound fertilizer maker said.

A Chinese company would ideally seek an off-take deal with Potash Corp in the event of a joint venture. However, any off-take agreement would have to be structured around Canpotex — the international marketing arm of potash producers Potash Corp, Mosaic Co and Agrium Inc.

Some analysts also believe a consortium of companies may consider the joint-venture model if they are unable to secure enough capital for an all-out bid.


BHP has a history of being conservative and disciplined on takeovers. In this scenario, it abandons the bid just as it did with its attempt to take over Rio Tinto.

Alternatively, BHP raises its bid, but after surveying shareholders, finds that it would be unsuccessful and backs out.

BHP Chief Executive Marius Kloppers will want to avoid a replay of Rio Tinto’s 2007 takeover of Canadian aluminum company Alcan, in which Rio got caught up in a bidding war at the height of the commodities boom and spent $39 billion in cash, but later admitted it paid too much and had taken on too much debt.


This outcome is possible if BHP is willing to substantially raise its bid for Potash.

Some analysts argue that it would take an offer of at least $150 a share, while others say Potash’s net asset value alone is in the region of $160 to $170 a share.

Potash shareholders clearly remember that the stock touched a high of $240 in 2008.

The tone of Potash’s comments from a conference call on Tuesday suggested that the company, while balking at the current $130 a share offer, is not averse to a sweetened bid.

BHP has a cash pile estimated at $11 billion, but shareholders might complain that it is paying too much.

Some analysts say BHP could pay up to $200 a share, and a deal would only hurt earnings if it were more than $165 a share, but those levels are unlikely.

However, BHP bid faces an obstacle — formal approval by its own shareholders — if it sweetens its offer by more than 22 percent.


Potash may be tempted to bulk up its balance sheet with debt to make it a more expensive deal for BHP.

It could borrow cash and return it to shareholders via a special dividend, or use the funds to boost stakes in firms such as Chile’s SQM or China’s Sinofert.

Some suggest that Potash Corp could strike a side deal to thwart BHP — CF Industries was able to foil a hostile bid from Agrium earlier this year by acquiring rival Terra.

“We reckon that Potash Corp could look at Agrium as a possible acquisition target. We believe Agrium is a good strategic fit on the wholesale fertilizer business and Potash Corp would gain an impressive distribution network,” said Dundee Capital Markets analyst Richard Kelertas.

(Reporting by Euan Rocha in Toronto, Michael Erman in New York, and Eric Onstad in London; editing by Peter Galloway)

Scenarios: What could happen to Potash Corp