BHP Billiton, the world’s biggest miner, launched a hostile $39 billion bid for Potash Corp after the Canadian fertilizer group’s board rejected the world’s largest takeover offer this year.
BHP Billiton said on Wednesday it was submitting it directly to shareholders and bypassing Potash Corp’s board, which a day earlier called the bid of $130 a share “grossly inadequate.”
The Anglo-Australian miner, sitting on an estimated $11 billion cash pile, is looking to capitalize on a resurgence of the global fertilizer industry following a collapse in demand during the global economic slowdown.
BHP wants to become the largest fertilizer supplier to a world where survival means more farm production and China’s voracious appetite for commodities is expected to grow. “We firmly believe that Potash Corp shareholders will find the certainty of a cash offer, at a premium of 32 percent to the 30-trading day period average, very attractive and we have therefore decided to make this Offer directly to those shareholders,” BHP Billiton Chairman Jac Nasser said in a statement.
BHP said it expected a deal to add to earnings in the second full fiscal year after completion and had arranged financing. It put total funds required for the deal at $43 billion, including options and pension obligations.
BHP SHARES DOWN
Ahead of the announcement, BHP shares closed down 4.4 percent to A$38.42 and the cost of insuring its debt rose on concerns the miner may be forced to raise its offer to win over shareholders.
Potash Corp shares in New York jumped 28 percent to $143.17 on Tuesday, about 10 percent above the bid price but still well short of its all-time high above $241 in 2008.
“Everyone’s saying they’ll have to pay more,” said Tom Elliott, Managing Director of MM&E Capital based in Melbourne, a hedge fund that takes positions in M&A situations.
One fund manager at a Japanese institution that holds both Potash Corp and BHP shares said a bid just above Potash Corp’s current price could be successful.
“Looking at the past, $146 will be appropriate. I feel anything above the level would make it difficult to win support from shareholders of BHP,” the fund manager said, on condition of anonymity.
BHP Billiton has long been interested in expanding into potash for its next spurt of growth, but investors had expected it to focus on growing its own assets, including the Jansen potash deposit in Canada.
While expecting BHP to raise its bid after the hostile reception from Potash’s board, bankers, analysts and investors said BHP was unlikely to face any rival bidders, so the Potash Corp board may find it difficult to push BHP too hard.
“It’s a sizable acquisition. There are not too many companies that can do that. There are not too many dance partners Potash can dance with,” said Rohan Walsh, investment manager at Karara Capital, which owns shares in BHP.
Obvious potential contenders, Rio Tinto and Brazil’s Vale, were both seen as unlikely to take on BHP in a bidding war.
Rio has only recently sold off potash assets in Argentina and Canada to help pay down a mountain of debt it took on for its ill-timed takeover of Alcan, and it has committed to spend $13 billion on development projects in the next 18 months.
Vale would be more likely to wait to pick up any potash assets BHP might be forced to spin off after taking over Potash, one analyst said.
Potash fits with BHP’s strategy of chasing large, low-cost, expandable, exportable commodities, and has the added advantage of being a tightly controlled market. It also has a huge potential market in China, already BHP’s biggest customer.
Analysts noted China produced very little potash while demand was expected to soar as it boosts food output.
“China consumes half the commodities in the world, more or less. A market like potash where their consumption is yet to seriously pick up is one you’d want to get into,” an analyst in Sydney said on condition of anonymity.
CAN PAY MORE
Not all BHP shareholders were sanguine about the offer.
“We’re surprised at the multiple that they’re prepared to pay for Potash Corp,” said James Bruce, a portfolio manager at Perpetual Investments, which owns BHP shares.
At $130 the bid would be worth 17.1 times forecast earnings for 2011, compared with BHP, trading on a multiple of 11.4, and Potash rival Mosaic Co, on a multiple of 14.8.
“At $130 it would be a great deal. If they get it at $150 it’s a decent deal, and it’s a strategic deal,” said an analyst who declined to be identified, adding that BHP may have to offer at least $170 a share to get Potash’s board interested.
BHP should have no problem paying for the deal out of cash and debt. As of June, analysts estimate it had more than $11 billion in cash on hand, with a gearing of around 16 percent.
“BHP is a desirable credit, and banks are generally more than happy to lend to such companies with a good credit history,” said a loans banker, who declined to be named as he was not directly involved.
Moody’s Investor Services said an offer could affect BHP’s credit rating.
“If a formal takeover offer is made, and predicated upon substantial debt raising, the long-term A1 ratings of BHP Billiton entities are likely to be placed on review for possible downgrade,” said Terry Fanous, Moody’s senior vice president. Potash Corp of Saskatchewan has left the door ajar, saying it might consider a more attractive proposition.
BHP Chief Executive Marius Kloppers has a reputation for not paying too much, after deciding to walk away in 2008 following a year-long campaign to take over Rio Tinto.
“The organization (BHP Billiton) has exhibited a very disciplined approach to M&A activity historically. There’s no reason it’ll change from this point on,” said Tim Schroeders, a portfolio manager at Pengana Capital, also a BHP shareholder.
Five-year credit-default swaps on BHP Billiton’s debt have widened by 13 basis points since Tuesday and were quoted at 87-90 points, according to a trader at a European bank.
BHP is being advised by JPMorgan, while Potash Corp is being advised by BofA Merrill Lynch, Goldman Sachs and RBC Capital Markets. The deal could yield potential fees of $170-$190 million to advisers, according to Thomson Reuters data.