BHP Gains Upper Hand in Potash Battle - TheStreet

BHP Gains Upper Hand in Potash Battle

BHP Billiton, saying it will remain 'disciplined' with its $40 billion bid for Potash, may hold a trump card as it pursues its hostile takeover.
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NEW YORK (TheStreet) -- The momentum may have swung in BHP Billiton's (BHP) - Get Report favor Wednesday in its attempt to swallow Potash (POT) for nearly $40 billion.

Shares of Potash declined by about 2% Wednesday after BHP rattled its sabers a bit in the wake of its fiscal-year earnings report.

The Anglo-Australian mining goliath indicated that it wouldn't be budging on its $130 per-share offer -- not any time soon, at least. BHP boss Marius Kloppers, the South Africa-born CEO whose stature as a wily practitioner of the dealmaking arts has grown exponentially since last week, vowed Wednesday that BHP would be "disciplined on this bid."

>>After Potash, 4 Fertilizer Takeover Targets

Later, appearing on

CNBC

,

Kloppers said

, "There's not an infinite universe of potential bidders," adding, "nothing is impossible, but this is a large transaction, the fit with us is pretty unique, and financing a $40 billion takeover in cash -- only a few players are capable of doing that."

The company took its bid

directly to Potash shareholders

on Friday.

Possibly BHP knows that no other buyers (or

group of buyers

) could squeeze the same returns out of Potash that the big miner could. If another party were to win out and strike a deal with Potash, BHP would likely proceed with its plans to build out another potash mine it's been in the process of developing, in Jansen, Saskatchewan. It would be the first new potash mine constructed in the province in 30 years.

Eventually, when it begins production (which BHP has projected for 2015, an abnormally short period of time for potash-mine development, some say), it will add supply to a potash market that has until now been tightly controlled by a group of cartels -- an oligopoly of 14 global producers. With Jansen online and churning out potassium compounds, it would threaten to undercut world potash prices, hurting the profits of everyone in the business.

For its part, BHP has suggested that it would opt out of the North American potash cartel should it succeed in buying the fertilizer behemoth, and that it would run its newly acquired mines harder than Potash has in the past. In doing so, BHP would reduce its cost of production even while playing looser with the supply side. That's been the BHP way since before Kloppers took the helm in 2007: the hard-charging company likes to operate its mines at full capacity, no matter where in the commodities supply-demand cycle the world markets happen to be. By doing so, BHP feels it's wringing all it can out of each mine's finite lifespan.

Of course, the company wouldn't want to destroy the value of the asset it had just purchased. Further, the North American cartel of potash exporters, called Canpotex, which includes Potash, Mosaic and

Agrium

(AGU)

, is something of a cash cow for the local Saskatchewan economy and government. Canadian authorities, in considering the approval of any BHP-Potash deal, may therefore have something to say about the Canpotex matter.

Agrium CEO Mike Wilson chimed in on the subject Wednesday, telling Canada's Business News Network that BHP would be "crazy to leave" Canpotex.

The whole Jansen project has been described by some -- including Potash CEO Bill Doyle -- as a smokescreen for BHP as it prepared its bid for the world's largest fertilizer producer. (Potash has long held that BHP's projections for Jansen's development were pie-in-the-sky, given the challenges in building potash mining shafts, which can go as much as a mile underground.)

Now, Jansen is looking more like a trump card. Charles Neivert, the fertilizer and chemicals stock analyst at Dahlman Rose in New York, said of BHP, "These guys have done a great job in fencing off all these other" possible bidders. " He added, "They have Jansen in their back pocket."

Still, most observers, including Neivert, believe that BHP will have to raise its bid eventually, rival or not, since it would appear highly unlikely that Potash shareholders would accept $130 a share.

And it's certainly possible that other bidders will come public with Potash offers. Chinese interests, for example, might be happy to give up some of Potash's profit margins in order obtain a bit more control over global prices for the fertilizer.

Earlier Wednesday,

BHP reported results

for the fiscal year ended in June. Though its profit more than doubled, it still missed Wall Street's targets for those 12 months. BHP also said it "remains cautious on the short-term outlook for the global economy."

Potash shares finished Wednesday's regular session at $145.50, down $3.61, on volume of 11 million. Mosaic's stock, which had risen sharply since the BHP takeover news broke on speculation that it, too, may become a target, also declined Wednesday, closing at $56.28, down a little more than 3%.

-- Written by Scott Eden in New York

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