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PotashCorp Snubs BHP Billiton

Fertilizers: Both companies see a bright future for crop nutrients but can't agree to a takeover deal

by Alexander H. Tullo
August 19, 2010 | A version of this story appeared in Volume 88, Issue 34

Credit: PotashCorp
A PotashCorp mine in Saskatchewan.
Credit: PotashCorp
A PotashCorp mine in Saskatchewan.

Potash Corp. of Saskatchewan has rejected the $40 billion acquisition offer of BHP Billiton, and now the Australian mining giant is taking its bid for the fertilizer company directly to shareholders.

The offer "provides PotashCorp shareholders with value certainty and an immediate opportunity to realize the value of their shares in the face of volatile equity markets," BHP Billiton's chairman, Jacques Nasser, said in a letter to PotashCorp's board.

In a conference call with investors, PotashCorp CEO William J. Doyle gave a rebuttal. "We believe we are on the verge of an inflection point where potash demand is expected to return to historical trend line growth and tightened supply and improved pricing," he said.

PotashCorp's board unanimously rejected BHP Billiton's $130.00-per-share offer, maintaining that it "grossly undervalues" the company. The offer represents a 16% premium of its stock price on Aug. 16, the day before the offer was disclosed to the public. In mid-2008, when the fertilizer industry peaked before the financial downturn, PotashCorp stock was trading at more than $200 per share. That year, the company had nearly $3.5 billion in earnings on $9.4 billion in sales.

On Aug. 17, PotashCorp shares immediately jumped to $140.00 on news of the offer, an indication that shareholders are anticipating a better deal than BHP Billiton's tender offer.

Analysts also are anticipating a bid that is better than the initial $130.00-per-share offer. After BHP Billiton's acquisition bid, David Begleiter, a stock analyst at Deutsche Bank, raised his target price for PotashCorp to $150.00 per share to reflect what he believes is the "minimum acquisition price," and he wouldn't rule out offers climbing as high as $175.00 per share.

PotashCorp is the world's largest producer of potash, which contains potassium compounds that enhance root growth in crops such as corn and soybeans. Its more than 13 million metric tons of potash mining capacity represents about 20% of the world's total. The firm generated net income of $1.0 billion on $4.0 billion in sales in 2009.

BHP Billiton mines for metals such as aluminum, copper, lead, zinc, gold, silver, iron, and titanium. It also has diamond and coal mines and an oil and gas exploration business. The company has been keen on entering the potash business because of a growing and increasingly wealthy world population. The company recently acquired a large land position in PotashCorp's backyard in Saskatchewan, where it has been planning a new potash mine.



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