Mining giant BHP Billiton Ltd. has offered to buy PotashCorp for $130 per share, or $40 billion. The widely-anticipated move was initially made to PotashCorp President and CEO William Doyle Aug. 12, and followed up with by a letter to PotashCorp Chairman of the Board Dallas Howe Jr. on Aug. 13. On Aug. 17, PotashCorp’s board soundly rejected the offer and initiated a shareholder rights program to make sure any deal was not done in haste. On Aug. 18, BHP took the offer directly to PotashCorp shareholders.
“The PotashCorp board of directors unanimously believes that the BHP Billiton proposal substantially undervalues PotashCorp and fails to reflect both the value of our premier position in a strategically vital industry and our unparalleled future growth prospects,” said Howe. “After careful consideration, and in the interest of transparency, our board determined to proactively disclose BHP Billiton’s unsolicited, non-binding proposal to our shareholders. We believe it is critical for our shareholders to be aware of this aggressive attempt to acquire their company for significantly less than its intrinsic value. The fertilizer industry is emerging from the recent global economic downturn, and we feel strongly that PotashCorp shareholders should benefit from the current and potential value of the company. We believe the BHP Billiton proposal is an opportunistic effort to transfer that value to its own shareholders.”
On Aug. 18, Melbourne-based BHP said it would take its offer directly to PotashCorp shareholders. “We firmly believe that PotashCorp shareholders will find the certainty of a cash offer, at a premium of 32 percent to the 30-trading-day period average, very attractive and we have therefore decided to make this offer directly to those shareholders,” said BHP Chairman Jacques Nasser. BHP plans to formally commence its offer by way of newspaper advertisement on Aug. 20. The offer will be open for acceptance until 11:59 p.m. (EDT) Oct. 19, 2010. BHP is seeking to buy at least 50 percent of PotashCorp shares, and ultimately 100 percent.
BHP says the offer represents an attractive premium of 20 percent to the closing price of PotashCorp’s shares on the NYSE on Aug. 11, the day prior to BHP Billiton’s first approach to PotashCorp. It is also a premium of 32 percent and 33 percent to the volume weighted average trading prices of PotashCorp’s shares on the NYSE for the 30-trading-day and the 60-trading-day periods, respectively, ended on the same date. BHP says the offer is fully funded and provides PotashCorp shareholders with immediate liquidity and certainty of value regarding the company’s growth potential in the face of volatile equity markets.
PotashCorp argued that BHP is proposing a premium of only 16 percent over PotashCorp’s Aug. 16, 2010, closing stock price and that this does not reflect the strategic importance, scarcity value, and quality of PotashCorp’s assets, or the unique opportunity PotashCorp affords to BHP Billiton or any other acquirer to move to the head of the class in the potash industry.
PotashCorp shares immediately shot past the $130 mark once the news was released Aug. 17, to close that day at $143.17 versus Aug. 16’s $112.15. Analysts jumped on the merger bandwagon and put target prices on PotashCorp of between $170-$180 per share. P.J. Juvekar of Citigroup labeled the 16 percent premium as “paltry” and called $170 a conservative target representing a 10 percent premium to PotashCorp’s replacement value. Hari Sambasivam of National Bank Financial, who targets the company at $180 per share, expects the offer to trigger a long takeover battle, with potential bids by other international mining giants such as Rio Tinto and Vale S.A. Others suggested that China might enter the fray. Jacob Bout of CIBC tabbed PotashCorp as the potash industries’ “crown jewel.” Analysts from Morgan Stanley also said $180 could make sense. Analysts also noted the potential for even more potash consolidation in light of the possible Uralkali and Silvinit combination.
Doyle told analysts Aug. 17 that the company would not speculate on a price that it might accept. On Aug. 18, BHP said it was offering the full value of PotashCorp. However, it sidestepped a question as to whether this was its best and final offer.
Doyle said BHP’s Jansen mine project, under development in Saskatchewan, has been “a smokescreen, a charade so to speak.” “We clearly saw through it, and we think now that our shareholders will see through it as well.” Doyle said Aug. 12 was the first time the company had been approached by BHP. Doyle said once the deal was offered there was no need for further negotiation, as the offer was so far beyond opportunistic that it really was not a constructive basis for negotiation. “I am saying that we are not opposed to a sale, but what I am saying is we are opposed to a steal of the company.”
BHP said the acquisition is consistent with BHP’s strategy of developing, owning, and operating a diversified portfolio of large, low-cost, long-life, expandable, export-oriented, Tier 1 assets. It said PotashCorp would provide it with an immediate leadership platform in the global fertilizer industry and further diversify BHP’s portfolio of Tier 1 assets. In addition, it said the acquisition leverages BHP’s global capability and experience in building, operating, and expanding mining operations.
BHP has different production, marketing strategy
Unlike PotashCorp, BHP indicated that it might run its potash mines full out, rather than balancing their operation due to supply and demand. “Our basic philosophy is to run our assets at full capacity and take the market prices, which effectively means that we maintain full employment throughout the cycle, also continuing our investment programs throughout the cycle,” said Marius Kloppers, BHP CEO, executive director, and chairman of the group management committee. “And we do this by always ensuring that we’ve got low cost assets on the illustrative cost curves, which means that logically they are the assets that should be run in good times and in bad times.”
Kloppers said BHP is in business for long-term returns. He said the company is willing to cope with the vagaries of market prices, and that it really does not take a near-term price view.
Would BHP exit Canpotex?
Kloppers said that it is the BHP baseline demeanor to market its own product. However, he said it would honor all commitments, and he did note that the company does have other products in its portfolio where it has arrangements with partners.
PotashCorp is responsible for over half the potash sold by the three Canpotex partners, the other two being The Mosaic Co. and Agrium Inc. Analysts and Saskatchewan officials last week expressed concern that an exit from Canpotex by PotashCorp would have a significant impact on the market. Canpotex, the export marketing arm for the three Saskatchewan producers, is the world’s largest potash exporter, normally selling 8-9 million mt/y.
Does BHP really want PotashCorp’s N & P assets?
Kloppers emphasized the funding for the deal is not contingent on selling any of the PotashCorp assets. “You can see from the price line of PotashCorp’s capital redeployment program that the growth program is primarily geared towards becoming a bigger potash producer relative to those other businesses.” However, he said BHP has very similar situations in other parts of its portfolio.
Despite Kloppers’ assurances, industry speculation last week was that BHP might at some point spin off non-potash assets, particularly nitrogen.
BHP promises strong presence in Canada
BHP said it would base its new potash business in Canada with a president and management, and would put a Canadian on the BHP board. BHP intends to continue PotashCorp’s planned and previously announced capital programs. In addition, BHP will continue to progress its plans to develop its Jansen greenfield potash project. BHP said it has invested almost $1 billion in potash exploration and acquisitions in Saskatchewan, developing its own project as well as acquiring Anglo Potash Inc. and Athabasca Potash Inc.
BHP would also commit to retaining employment levels, as well as capital and exploration programs.
BHP also said it is committed to strong community relations, and intends to bring PotashCorp’s spending commitments on community programs in line with BHP’s global commitment levels.
BHP’s policy is to spend 1 percent of Profit Before Tax, on a 3-year rolling average basis, on community programs.
In addition, BHP noted that it has had business interests in Canada for almost 40 years, the most significant of which has been EKATI in the Northwest Territories – one of the world’s premier diamond mines. BHP says it has invested approximately US$5 billion in Canada since EKATI began production in 1998.
Analysts also questioned whether the Canadian government would allow the deal, i.e., allowing an offshore company to acquire a majority stakehold in a major Canadian-based resource company.
Shareholder rights plan
PotashCorp said the plan is intended to ensure that in the context of a formal takeover bid, the board has sufficient time to explore and develop alternatives to enhance shareholder value, including competing transactions that might emerge. The board authorized the issuance of one share purchase right in respect to each common share of PotashCorp outstanding as of the close of business on Aug. 16, 2010 (and each share issued thereafter, subject to the limitations set out in the rights plan). The rights will become exercisable if a person, together with its affiliates, associates, and joint actors, acquires or announces an intention to acquire beneficial ownership of shares which, when aggregated with its current holdings, total 20 percent or more of PotashCorp’s outstanding common shares, subject to the ability of the board to defer the time at which the rights become exercisable and to waive the application of the plan.
Following the acquisition of more than 20 percent of the outstanding common shares by any person (and its affiliates, associates, and joint actors), each right held by a person other than the acquiring person (and its affiliates, associates, and joint actors) would, upon exercise, entitle the holder to purchase PotashCorp’s common shares at a substantial discount to their then-prevailing market price.
The plan permits the acquisition of control of PotashCorp through a “permitted bid,” a “competing permitted bid,” or a negotiated transaction. A permitted bid is one that, among other things, is made to all holders of shares, is open for a minimum of 90 days, and is supported by a majority of PotashCorp’s shareholders.