Potash may have little choice but to negotiate

By Reuters
Posted Oct. 18, 2010 at 4:20 p.m.

With its options running out and time running out, Potash Corp may soon have little choice but to negotiate with BHP Billiton over the $39 billion bid that the world’s largest fertilizer supplier has flatly rejected.

Since the Anglo-Australian miner announced its hostile bid in August, Saskatchewan-based Potash Corp has repeatedly assured investors that a rival offer would emerge. None has, and nearly all of the prospective suitors mentioned two months ago are now considered out of the running.

Still, a consortium could emerge to buy a big enough stake in Potash Corp to block BHP’s bid, or the fertilizer maker may opt to break up the company and pay out a hefty special dividend to investors as a way to escape BHP’s embrace.

But analysts and bankers see both of those scenarios as long shots that shareholders are unlikely to approve even if they came to fruition.

“It depends on whether common sense or testosterone start to play here,” said a banker who is not working on the deal, referring to whether Potash Corp drops its steely resistance and enters into negotiations with BHP.

In addition, the banker said, BHP would have to be willing to raise its bid enough to enable Potash to portray the deal to its shareholders as a victory, the banker said.

Potash Corp doesn’t have the luxury of time. The Nov. 18 deadline on BHP’s bid is fast-approaching, and BHP has a huge head-start in completing a regulatory process that any counter-bidder would have to start.

“Potash Corp have not attracted a cover bid yet, and everything that’s been talked about in terms of alternatives is very complicated and convoluted — and therefore sounds unlikely to occur,” said Soleil Securities analyst Mark Gulley.

“It seems to me that at some point in time, they would have to enter into some kind of discussions with BHP,” he added. Most of Potash Corp’s most likely suitors have gradually ruled themselves out or faded from the discussion. They include large resource companies like Vale, Rio Tinto and Teck Resources, as well as a host of large domestic and overseas funds.

Last week, Chinese chemical conglomerate Sinochem — long seen as the most viable candidate to lead a counter-bid — backed out of the race, virtually ending all chances of a serious rival to BHP’s $130-a-share offer, sources familiar with the matter told Reuters.


Potash Corp’s management, led by CEO Bill Doyle, may benefit the most from a negotiated deal, and that alone makes it the most likely scenario, says one banker, who is not working on a deal.

“You can guarantee that if someone is going to get $500 million to $600 million as CEO of a company, then that trade is going to happen. It just comes down to price,” the banker said.

Doyle is expected to net about a half billion dollars if Potash Corp is sold.

To be sure, two other scenarios, while unlikely, are still in the realm of possibility.

Media reports suggest that some Canadian fund managers are examining the possibility of buying a “blocking stake” in Potash Corp to thwart a foreign takeover of the Canadian resource giant.

“I don’t see how this deal benefits shareholders,” said Soleil’s Gulley. “It is a bit of a head-scratcher, at least at this juncture.”

Indeed, such a deal could trigger further legal action by Potash Corp’s shareholders. Earlier this month, three small shareholders launched a class-action suit accusing the company of disregarding their interests in rejecting BHP’s bid.

Even so, Alberta Investment Management Co is looking into the possibility of organizing a group of Canadian funds in buying a blocking stake, according to Canada’s Globe and Mail newspaper. The plan, which is considered a long shot, envisions the funds taking an equity investment of about 30 percent in Potash Corp.

Such a plan is likely to placate those concerned about a foreign takeover of Potash Corp, analysts say, but it would also be complex to structure and would likely result in dilution for Potash Corp’s existing shareholders.


Another idea being floated as Potash Corp’s last resort involves a break-up of the company via a sale of its nitrogen and phosphate businesses, along with its overseas equity investments.

The company could then leverage up its remaining potash business with an additional $6 billion in debt and use all the proceeds to payout a large $60-to-$70-a-share special dividend to shareholders.

But, many doubt that such a move will create additional shareholder value.

“Let’s say it announced a $60 dividend today, what would the stock do? It might tick up a little. It might thwart BHP. Potash Corp will probably get sued, but after you pay the 60 bucks you are going to be left with a pure play in potash, which is highly leveraged. It doesn’t sound like a real value creator,” said Chris Damas of BCMI Research.

Damas also doubts that the after tax proceeds generated by the asset sales would justify such a move.

“I don’t think you can make more pie by splitting this up,” he added.

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