PotashCorp rejects major miner’s overture

The world’s second-largest mining company’s proposal for a “possible acquisition” of the world’s biggest potash firm hasn’t been met with open arms.

Australian mining giant BHP Billiton confirmed Tuesday it “has made an approach” to PotashCorp “regarding a possible acquisition” of the Saskatoon fertilizer producer at US$130 per common share — in all, about US$38.56 billion.

But Billiton added that it will further review its options, as PotashCorp’s board of directors “has not agreed to engage in discussions.”

That’s a mild way of saying PotashCorp’s board, earlier Tuesday, publicly rejected what it called a “grossly inadequate” and “aggressive attempt to acquire (PotashCorp) for significantly less than its intrinsic value.”

PotashCorp on Tuesday also slapped a “poison pill” over its shares, a policy that publicly-traded firms who use it usually describe as a “shareholders’ rights plan.”

A poison pill, if triggered by an unasked-for takeover bid, automatically floods the market with cut-price shares that are offered to every shareholder other than the unsolicited bidder, diluting the value of that bidder’s stake.

In PotashCorp’s case, the company would swallow the pill by issuing new shares at a “substantial discount” to its shares’ market price, if or when any unsolicited shareholder buys up more than 20 per cent of Potash’s shares.

PotashCorp’s rights plan, however, allows for a takeover through a “permitted bid” or a negotiated deal.

The company described a “permitted bid” as one that’s “made to all holders of shares, is open for a minimum of 90 days and is supported by a majority of PotashCorp’s shareholders.”

PotashCorp said Tuesday its board went through “careful consideration” before going public with Billiton’s non-binding proposal, which came last Friday in the form of a letter from Billiton chairman Jacques Nasser.

“Catalysts”

Potash’s chairman Dallas Howe said the board “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.”

The fertilizer industry, Howe said, “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.”

PotashCorp said it “firmly believes it is on the verge of an inflection point, where potash demand will return to historical trend-line growth, supply will tighten, and pricing will improve.”

Market drivers spurring the need for crop nutrients, such as population growth and improving diets in developing countries, have “changed little as a result of the global downturn, and the catalysts expected to fuel near- and medium-term demand are accelerating,” the company said.

Moreover, the company said, it’s “uniquely positioned as the premier global producer with unparalleled potash assets in an industry characterized by substantial barriers to entry, few producers and no known product substitutes.”

Melbourne-based Billiton’s proposal doesn’t compensate shareholders for that strategic position or “scarcity value,” PotashCorp said.

Furthermore, it added, Billiton’s proposed bid per share is a premium of “only 16 per cent” over its Aug. 16 closing stock price, making it “substantially inferior even to average control premiums globally and in Canada.”

PotashCorp shares shot up by over 25 per cent Tuesday, at one point touching C$149 (US$144.32), indicating the market expects a sweeter bid to come forward.

“Strategically important”

Billiton, for its part, has already made its presence known in potash-rich Saskatchewan. It paid C$341 million in January for Athabasca Potash, a junior potash firm based in Saskatoon, and in 2008 bought out its partner in another Saskatchewan potash project, paying C$284 million for Anglo Potash of Calgary.

Billiton, as of early June, controlled exploration rights to a total of over 14,000 square kilometres of what it called “highly prospective ground” in Saskatchewan’s potash basin, some sitting right next to PotashCorp’s own assets.

“Potash is strategically important for BHP Billiton, offering the group an avenue for significant growth and further diversification by commodity, customer and geography,” Graham Kerr, Billiton’s president for diamonds and specialty products, said in a release at that time.

From farmers’ perspective, market watchers had viewed Billiton’s advances in Saskatchewan as some potential pressure on the “oligopoly” of the few major players handling the province’s potash resource.

PotashCorp started life as a Saskatchewan Crown corporation in the 1970s and was privatized in 1989. It now bills itself as the world’s largest fertilizer company by capacity and produces nitrogen and phosphate as well as potash, in which in controls about 20 per cent of global capacity.

The province’s energy and resources minister, Bill Boyd, was quoted Tuesday by the Canadian Press news service as reminding potential bidders that PotashCorp’s head office is required to remain in Saskatchewan, as per legislation the provincial government passed when it sold the company.

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