Thread: BHP Makes $38.6 Billion Takeover Bid for Potash UPDATED

BHP Makes $38.6 Billion Takeover Bid for Potash

BY ANUPREETA DAS, SCOTT KILMAN AND LIAM PLEVEN

Australian mining giant BHP Billiton Ltd. made an unsolicited $38.6 billion offer for the world's largest fertilizer maker, Potash Corp. of Saskatchewan Inc., in an aggressive wager that developing economies will drive up demand for the world's food supply.

Potash, along with nitrogen and phosphate, are key crop nutrients that replenish soil and increase the amount of crops produced on farmland. The world's potash supplies are relatively limited and Potash Corp., based in the prairies of central Canada, controls 20% of the globe's supply.

BHP Billiton's offer will likely set off a months-long struggle for the fate of the company, regarded as one of the crown jewels of Canada's natural-resources-based economy.

On Tuesday, Potash Chief Executive Bill Doyle said the company's board isn't opposed to a sale. "We just don't expect someone to come steal the company," he said.

In an Aug. 12 letter, BHP Billiton offered to buy Potash for $130 a share, a 16% premium to Potash's Monday closing price. The offer did little to persuade Potash's board, which disclosed the approach and called it "grossly inadequate" in a news release.

In trading Monday afternoon, Potash shares were up 27% at $142.67 each, a sign that traders expect BHP Billiton to significantly bump its offer price, or that Potash may attract other suitors. People familiar with the matter said BHP would decide during the next few days whether to take its offer directly to Potash shareholders, a move that would officially make BHP's unsolicited offer a hostile one.

"They're big boys and they have to pay big-boy prices," Mr. Doyle said. He refused to discuss what might be a more suitable offer, but people close to the company said that for Potash to enter into negotiations, the offer needs to factor in the company's record-high price of $240. That price came at the market peak in 2008, before the recession cut into demand.

Looming over any price negotiations is a bigger national debate in Canada about open markets and foreign takeovers. Over the past decade, the country has lost most of its big natural-resources companies and many of its industrial champions to foreign buyers from the U.S., China and South America. Those include sales of its biggest aluminum and nickel mines to Brazil's Vale and Switzerland's Xtrata PLC, as well as the purchase of the country's biggest steel producer by United States Steel Corp. and the piecemeal sale of technology giant Nortel Networks Corp. to buyers from the U.S. and Europe.

While this demand for commodities has fueled Canada's economic growth, there is a lingering worry that the country is losing its corporate mettle. In 2009, the country amended its foreign takeover code, raising the bar for scrutiny of some investments but allowing the government explicit power to veto deals that aren't in the national interest.

As the world's largest mining company, BHP Billiton has remained unbowed by a costly and ultimately unsuccessful attempt to acquire Australian mining giant Rio Tinto in 2008. For BHP's chief executive, South African Marius Kloppers, a play for Potash fits into a broader theme of economic development, particularly in China and India.

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BHP offered $130 a share, a 16% premium to Potash's Monday closing price.
."World GDP and GDP development is being driven by…new people entering the modern industrial age…by massive urbanization processes," Mr. Kloppers told The Wall Street Journal in 2008, as he sought to cinch a $150 billion bid for Rio Tinto. This, he said, is "having a huge knock-on effect in demand for our products." For Mr. Kloppers's approach to pay off, fertilizer prices will need to increase significantly in the years ahead, perhaps 40% to 50% more from current levels, according to Tony Robson, an analyst at BMO Capital Markets.

There are certainly plenty of reasons to believe the world needs more fertilizer. Between 2000 and 2050, the world is projected to add 57 million people a year annually on average, leading to an expected global population of 8.9 billion by 2050, according to the United Nations. Rising incomes in the world's fast-growing economies will also push up demand for diverse diets, including fruit and vegetables, and fertilizer is one surefire way to significantly increase food production.

Potash is often found a mile underground and is energy- and cost-intensive to develop. Developing a potash mine is such an expensive and time-consuming process that global supplies tend to grow slowly. For instance, it takes at least five years for a potash producer to dig into the ground and deliver the chemical to the market. In recent years, BHP has tried to build its own potash play from scratch, acquiring exploration rights in Saskatchewan.

BHP is also counting on governments in China, India and other rapidly growing nations starting to place a premium on producing more of their own food, in order to gain independence from foreign suppliers. That is critical to preventing civil unrest, as the world learned in 2008, when a sharp rise in the cost of food kicked off violent riots around the world. This summer's scare over wheat supplies amid a Russian drought provided a vivid reminder, too.

"It's just a bet that food is going to continue to be precious, and become more precious," said Emerson Nafziger, a professor of agronomy at the University of Illinois at Urbana-Champaign. "It's a bet that the whole world is going to need to replace nutrients in the soil as crops are removed."

China, for instance, produces roughly half as much corn as the U.S. on the same amount of land. U.S. farmers generate at least 10 metric tons per hectare, while China produces just over five metric tons and India produces over two. Parts of Africa are even lower, according to the U.S. Department of Agriculture. Gaps between developed and developing nations exist in other crops as well, including rice and wheat, though China's wheat yield is higher than in the U.S.

USDA forecasts released last week show the world will likely consume more grain through next year than farmers are able to produce, which will inevitably shrink the globe's grain reserves again. World fertilizer demand fell 7% in 2008-09, then rebounded by 3.7% in 2009-10, to 162.5 million metric tons, according to the International Fertilizer Industry Association. Demand is expected to rise an additional 4.8% in 2010-2011, to 170.4 million metric tons, the group forecast, and is expected to reach 188.3 million metric tons in 2014-15, which would represent an average annual growth rate of 2.5% compared wjth the average of the past three years.

Moreover, if prices for agricultural commodities rise in years ahead, that will boost the incentive for farmers to make an investment in more fertilizer, said Don Roose, the president of U.S. Commodities Inc. in West Des Moines, Iowa. "It's the seed and the fertilizer that's going to help reach your potential. After that, it's all up to the weather," he said.

http://online.wsj.com/article/SB1000142 ... 21512.html

Seems a bit early yet, but, let the hostile takeovers begin. M&A coming right up?

Perhaps being this one is a commodity the timing is better suited?

August 18, 2010, 1:41 PM ET.

Potash Pops as BHP Goes Hostile.

By Matt Phillips

Potash jumps 2.8% as BHP Billiton says it will take its $38.6 billion offer for the miner of fertilizer ingredients directly to Potash shareholders. (Potash’s board rebuffed BHP’s initial round of footsy.) “We believe the offer has to go materially higher as initial hostile offers typically do, with Vale the most likely (50% likelihood, in our opinion) to enter a bidding war for [Potash],â€