On August 17th, BHP Billiton (BHP), the largest mining company in the world, made an unsolicited offer to acquire Potash Corp (POT) for $130 per share. BHP operates around the world and is a major producer of almost every industrial metal as well as coal, and potash mining is a natural extension of it. BHP’s opportunistic offer or “stink bid” comes at a time when the price of potash, the fertilizer, has fallen to a multi-year low. BHP’s $130 bid only represents a 16% premium over the share price for Potash prior to the offer, and is a far cry from the 50% plus premiums offered for Inco, Alcan (AL) and Falconbridge (FAL). The company’s share price peaked at $246 in June of 2008, briefly making Potash the most valuable company on the Toronto Stock Exchange. With Potash currently trading at $156, well above the $130 offer, the market clearly believes the bid is inadequate.
Some of our clients have called us wondering why we don’t just take our profits here and move on. Clients who had the stock and added to their portfolio in 2008 paid under $100. If no other offers are made or BHP walks away, won’t Potash’s stock just fall back to $120 or even lower? To answer that question, we have to look to China.
In 2008, the price of potash rose dramatically as shortages of rice forced food prices up, particularly in Asia. At the same time, the ethanol craze increased the acreage devoted to corn in the United States and reduced its availability as a food source, causing grain prices to spike. Fertilizer producers increased capacity at unheard-of rates to take advantage of high prices. Shortly thereafter the worldwide recession reduced food prices sharply and inventories of fertilizers swelled to record levels. Recently, fertilizer inventories have begun to fall, and grain prices are on the rise due to droughts in Russia and the Ukraine. For the first time in 15 years, China is now a net importer of corn to feed livestock, as newly wealthy urban Chinese demand more meat. Unlike stock market investors looking to make a quick buck on a takeover, China understands the long term value of potash. China needs to secure a reliable source of fertilizer today to meet the changing food diets of its more than 700 million people who have yet to be urbanized. We believe that a Chinese led consortium will make a competing offer which will draw BHP into a bidding war.
It is impossible to predict the outcome. The Government of Saskatchewan has retained the Conference Board of Canada to review the situation, even though Saskatchewan has no legal mechanism to block a takeover. Rumors abound about future bids. For the time being we are holding our position (we own about 35,000 shares for our clients) and waiting to see what happens next.
Disclosure: Author does not own Potash Corp.