BHP Billiton, the world's biggest miner, launched a hostile $39 billion bid for Potash Corp after the Canadian fertiliser group's board rejected this year's biggest takeover offer.
BHP Billiton said today it was making its $130 a share offer directly to shareholders, bypassing Potash's board which a day earlier called the bid "grossly inadequate". Investors and analysts expect BHP to have to raise its offer after Potash shares jumped a record 27 per cent to $143 a share yesterday, 10 per cent above the bid price.
The Anglo-Australian miner, sitting on an estimated $11 billion cash pile, is looking to capitalise on a resurgence of the global fertiliser industry.
BHP wants to become the largest fertiliser supplier to a world where survival means more farm production and China's voracious appetite for commodities is expected to grow.
"(This deal) further diversifies our footprint by customer, by geography and by commodity," BHP chief executive Marius Kloppers said on a conference call. "We are driven by a belief that potash mining has good long term industry fundamentals."
Potash is the common name for various compounds containing potassium, which are used mainly as fertilisers.
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.
Ahead of the announcement, BHP Australian shares closed down 4.4 per cent at 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. BHP's London shares fell about 1 per cent. Potash shares in New York jumped 28 per cent to $143.17 yesterday, but still well short of its all-time high above $241 in 2008.
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 bankers, analysts and investors said BHP was unlikely to face any rival bidders, so the Potash board may find it difficult to push BHP too hard.
Potash fits with BHP's strategy of chasing large, low-cost, expandable, exportable commodities, and has the added advantage of being a market controlled by only a few major players. It also has a huge potential market in China, already BHP's biggest customer.
"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.
Not all BHP shareholders were sanguine about the offer.
"We're surprised at the multiple that they're prepared to pay for Potash," 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 per cent.
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 has left the door ajar, saying it might consider a more attractive proposition.
Reuters