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BHP goes hostile in $39 billion Potash bid

BHP Billiton launched a hostile $39 billion bid for Potash Corp to become the world's top fertilizer maker after the Canadian group rejected this year's biggest takeover offer.
/ Source: Reuters

BHP Billiton launched a hostile $39 billion bid for Potash Corp to become the world's top fertilizer maker after the Canadian group rejected this year's biggest takeover offer.

BHP Billiton, the world's biggest miner, said on Wednesday it was making its $130 a share offer directly to shareholders, bypassing Potash Corp's board which a day earlier called the bid "grossly inadequate."

BHP went hostile quickly to counter a "poison pill" defense after the Canadian company rolled out a shareholder rights plan, and six banks have agreed to underwrite a syndicated loan of more than $40 billion to BHP, banking sources said.

Investors and analysts expect BHP to have to raise its offer after Potash Corp shares jumped a record 28 percent to $143 a share on Tuesday, 10 percent above the bid price.

"Everyone's saying they'll have to pay more," said Tom Elliott, Managing Director of MM&E Capital based in Melbourne, a hedge fund that takes positions in M&A situations.

The cost of insuring BHP debt rose on concerns the miner may be forced to raise its offer to win over shareholders, and after Moody's said it was reviewing the group's credit ratings for a possible downgrade.

The Anglo-Australian miner, sitting on an estimated $11 billion cash pile, is looking to capitalize on an expected surge in demand for fertilizer from developing countries looking to boost crop yields and feed rapidly growing populations.

The deal also fits into its strategy of building output in low-cost, exportable commodities, particularly those needed in China, its biggest market.

The sector has consequently attracted heated takeover interest, with BHP's move for Potash Corp following similar consolidation moves in Russia, which could lead to the formation of a new global No. 2.

In June, Kremlim-backed billionaire Suleiman Kerimov bought more than 50 percent of Russian potash giants Uralkali and Silvinit with some business allies. Market sources expect the state to support a merger between the two.

BHP seeks to diversify
The move for Potash Corp had surprised some, as BHP had been expected to focus on growing its own potash assets, including the Jansen deposit in the Saskatchewan region of Canada, which produces about a third of the world's supply and has huge reserves.

A deal would give BHP a 20 percent share of the global potash market now, rather than wait for its flagship Canadian deposit to hit full capacity in 2021.

"(This deal) further diversifies our footprint by customer, by geography and by commodity," BHP Chief Executive Marius Kloppers said on a conference call. "We are driven by a belief that potash mining has good long-term industry fundamentals."

Potash is the common name for various compounds containing potassium, which are used mainly as fertilizers.

BHP said it expected the deal to add to earnings in the second full fiscal year after completion and had arranged financing. It put total funds required for the deal at $43 billion, including options and pension obligations.

A fund manager in London, and top-20 shareholder in both BHP and Potash, was disappointed with the current bid, noting Potash shares were still well short of their all-time high above $241, set in 2008.

"We expect much more. In terms of share price we expect $170 a share," the fund manager said. "For BHP it is a great deal too, it has a lot of cash and can increase shareholder value."

One fund manager at a Japanese institution holding both stocks said a bid at $146 might be successful, but anything higher might spark opposition from BHP shareholders.

"We're surprised at the multiple that they're prepared to pay for Potash Corp," said James Bruce, a portfolio manager at Perpetual Investments, which owns BHP shares.

At $130 the bid would be worth 17.1 times forecast earnings for 2011, compared with BHP, trading on a multiple of 11.4, and Potash rival Mosaic Co, on a multiple of 14.8.

"At $130 it would be a great deal. If they get it at $150 it's a decent deal, and it's a strategic deal," said an analyst who declined to be identified, adding that BHP may have to offer at least $170 a share to get Potash's board interested.

Potash Corp has left the door ajar, saying it might consider a more attractive proposition.

Not likely to overpay
Kloppers has a reputation for not paying too much, after deciding to walk away in 2008 following a year-long campaign to take over Rio Tinto.

Bankers, analysts and investors said BHP was unlikely to face any rival bidders, so the Potash Corp board may find it difficult to push BHP too hard.

Obvious potential contenders, Rio Tinto and Brazil's Vale, were both seen as unlikely to take on BHP in a bidding war.

"Rio won't have the muscle to outbid Billiton, but financially they are in a much stronger place than they were a year ago. I think it would be a very high-risk strategy when the wounds haven't healed completely on the Alcan deal," said analyst Peter Davey at Ambrian investment bank in London.

Rio has only recently sold off potash assets in Argentina and Canada to help pay down a mountain of debt it took on for its ill-timed takeover of aluminum company Alcan, and it has committed to spend $13 billion on development projects in the next 18 months.

Vale would be more likely to wait to pick up any potash assets BHP might be forced to spin off after taking over Potash, one analyst said.

BHP is being advised by JPMorgan, TD Securities, Banco Santander, Barclays Capital, BNP Paribas and Royal Bank of Scotland.

Potash Corp is being advised by BofA Merrill Lynch, Goldman Sachs and RBC Capital Markets. The deal could yield potential fees of $170-$190 million to advisers, according to Thomson Reuters data.