Potash-BHP Deal Seen as Inevitable

Potash Corp. will likely strike a deal with BHP Billiton, analysts and investors say, but what's the magic number?
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(Updated with further commentary and for closing stock prices.)

NEW YORK (

TheStreet

) --

Potash Corp. of Saskatchewan

(POT)

will likely get what it wants from

BHP Billiton

(BHP) - Get Report

: a sweeter offer.

That's the opinion of the market, at least, with investors bidding shares of Potash up by more than 27% in frantic trading Tuesday, well above the $130 unsolicited all-cash offer price made by BHP Billiton, which sent a proposal letter to Potash's chairman back on Aug. 12.

Bill Doyle, president and chief executive officer of Potash Corp. of Saskatchewan Inc.

The companies also met last week, but Potash's board unanimously rejected the bid and then made the decision to out BHP on Tuesday.

Potash stock, a

notoriously volatile name

, reached a 52-week high on the news, surging to levels not seen since September 2008, just before the crash, when it traded at close to $180. During the boom years, when prices for the mineral potash itself expanded into bubble territory, ballooning to all-time highs of $1,000 a ton, Potash Corp.'s stock traded at about $230 a share.

Potash used the phrase "grossly inadequate" to describe BHP's proposal. In a conference call with analysts and investors Tuesday morning, Potash's top executives went to great lengths to argue that the company is worth more than the $38.6 billion that BHP's bid values the largest potash producer in the world, and that the company made the right decision in rejecting the offer. BHP's offer represents a 16% premium to the closing price of Potash stock on Monday.

During the call, Potash CEO Bill Doyle called that premium "particularly low given that our stock price does not adequately reflect our business fundamentals, which are just emerging from the recent downturn. Furthermore, BHP is attempting to transfer the value inherent in PotashCorp to its shareholders at the expense of our own shareholders."

The company said a coming recovery in fertilizer demand will boost its shares. It also trotted out its long-held premise, basically Malthusian, that an ever-expanding global population will mean an ever-rising need for nutrients that juice crop yields. No better way to do that, the premise goes, than farmers using on their fields liberal amounts of potash, a potassium compound extracted through shafts that must be sunk miles deep into the earth.

It's widely believed that a deal will get done -- and the price could go as high as $150 a share, say analysts at Dahlman Rose in New York. It would seem that negotiations, for all intents and purposes and despite Potash's protestations, have already begun.

Goldman Sachs

(GS) - Get Report

,

RBC Capital Markets

and

Bank of America Merrill Lynch

(BAC) - Get Report

have amassed their bankers in Potash's corner.

"I'm not saying that we are opposed to a sale," Doyle said in response to a question during the conference call, "but what I am saying is we are opposed to a steal of the company."

As one ag-stock investor told

TheStreet

, "I think the company is toast."

Potash has also put in place a shareholder rights plan that would strive to keep any entity from acquiring more than 20% of Potash's shares. But this isn't a poison pill, the use of which is restrained by Canadian law. It's a so-called "chewable pill" and would be set aside by the Canadian courts. The Canadian government in recent years has been far more open to foreign companies buying domestic assets than, say, the U.S. Tuesday afternoon, authorities in Ottawa said they would "closely monitor" the takeover drama, promising a "rigorous" review should a deal be struck,

Reuters

reported.

Potash said it will use the shareholder rights plan as a way to buy it time in order to "develop alternatives to enhance shareholder value," as it said in its press statement Tuesday morning. That could mean Potash will seek its own acquisitions, according to Doyle during the call.

BHP, known as an aggressive player and

long rumored as a potential acquirer of Potash

, certainly has the firepower to raise, with a widely reported war chest containing some $8 billion to $10 billion. The Aussie miner had already embarked on a plan -- perhaps a smokescreen -- to

enter the highly profitable global potash market

in a major way by developing its own assets in Canada, situated literally down the road from some of Potash Corp.'s biggest mines.

As the Australian company says on the portion of its corporate web site dealing with its potash plans, "At BHP Billiton, we believe in Saskatchewan." The statement was meant to address BHP's community relations, but it took on new meaning on Tuesday.

BHP's moves in Saskatchewan had been publicly pooh-poohed by Potash Corp., which maintained that the expense and time involved (as much as seven years) in building potash mines meant that BHP's ambitious plans were so much hot air.

But BHP had been pursuing that plan aggressively, saying that production at its Jansen property in Canada could begin by 2015 and that output from all its potash mines -- it's developing several others as well -- could eventually reach 20 million metric tons a year. That would amount to 40% of the total amount of potash expected to be produced globally this year. If BHP were to make good on its claims, then, it would destory the supply-demand balance that has buoyed the entire potash industry.

For years, a veritable oligopoly of more than a dozen potash miners -- some have called it a cartel -- has maintained a stranglehold on global pricing. Two of those players, Uralkali and Silvinit, are reportedly pursuing a combination, adding to the M&A buzz that has infected the fertilizer industry. Though the rate charged for a ton of potash has plunged since reaching all-time bubble highs in 2008, the oligopoly still controls the market enough to enjoy superlative profit margins.

Thus, some have described BHP's whole scheme to pursue organic potash growth as a "smokescreen" meant to disguise its real purpose: acquiring Potash Corp. -- which controls 17% to 20% of the global market -- thereby preserving the status quo margins of the industry.

Doyle, for one, said he believes this to be the case. "I do think the Jensen project has been a smokescreen, a charade so to speak, and we have talked aboutthis in the past," he said in response to a question on the conference call. "We clearly saw through it and we think now that our shareholders will see through it as well."

By the close of Tuesday's regular session, Potash shares had gained $30.89, or 27.5%, to $143.04. Volume reached more than 46 million shares, compared with average daily turnover of about 5 million.

The bid was interpreted as a bullish marker for the broader world economy. BHP, after all, would appear to have a constructive view on global demand for commodities, and specifically agriculture, to go ahead with the mammoth takeover proposal, no matter how cash-rich the aggressive Australian mining giant is, analysts say, and no matter how depressed relative to norms the valuations of fertilizer stocks remain.

The deal drama stoked the consolidation flames across the agribusiness field.

Vale

(VALE) - Get Report

, for instance, the Brazilian mining giant with substantial potash assets, had been in buyout talks with Potash Corp. rival

Mosaic

(MOS) - Get Report

as late as last year.

Indeed, it's not outlandish to think that BHP could face another bidder for Potash, industry observers say, with Vale cited as the most logical rival. Though the Rio de Janeiro-based minerals giant doesn't have nearly as much cash as BHP, the company could team with a partner -- perhaps a Chinese partner -- to make a competing offer.

China constitutes one of the largest, and certainly the fastest-growing, markets for the crop nutrient in the world. As with the run-up in the price of industrial metals last year, China is seen as the worldwide growth engine for agricultural raw materials as well.

The broader market responded to the news Tuesday, and so did fertilizer stocks, a sector already ablaze with deals, not to mention weather. Droughts in Russia and floods elsewhere in the world have characterized a summer of extreme climactic events, which in turn

have driven crop prices higher

. That, in turn, has fueled a rise in agriculture stocks this summer as well.

On Tuesday, the

Dow Jones Industrial Average

finished higher by more than 100 points after earlier rising by as many as 178.

Shares of Mosaic, viewed as the most likely takeout target after Potash, spiked by more than 9%.

Agrium

(AGU)

, the Canadian company that

made a bid for Australian farm-products distributor

AWB

on Monday, gained 5%. And

CF Industries

(CF) - Get Report

, which successfully fended off Agrium's hostile bid by acquiring Terra Industries earlier this year, saw its stock jump 4.3%.

-- Written by Scott Eden in New York

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