BHP massively hostile to Canadian fertiliser firm

BHP Billiton launches a hostile $40bn mega-bid for Potash - and there's no love lost between them...

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Last Updated: 31 Aug 2010

BHP Billiton is flexing its not-inconsiderable financial muscle: the deep-pocketed Anglo-Australian miner has just gone hostile with a fully-funded $39bn bid for Canada-based Potash, the world’s biggest listed fertiliser maker. BHP claims that it’s going straight to shareholders because Potash leaked its interest, against its wishes – although the fact that the Canadian firm’s board dismissed the offer as ‘grossly inadequate’ was probably significant too. Of course this may all be a negotiating ploy designed to squeeze more cash out of BHP. And it might well work. But it’s hardly the most amicable start to their relationship…

BHP is offering Potash shareholders $130 per share, in cash – a 20% premium to the company’s undisturbed share price. Sounds a lot, and with an overall price tag of almost $40bn, it would be the biggest M&A deal since last June, according to the FT (via Dealogic) – not to mention one of the largest in Canada’s history. Nonetheless, the market seems to think BHP will have to dig considerably deeper than that, despite boss Marcus Kloppers’ protestations to the contrary. Potash’s shares have already shot up above the $143 mark, suggesting investors think the final price will end up being a lot higher.

The deal would be a slight departure for BHP, but you can see why it thinks the area is ripe for the picking (so to speak). Potash is apparently the world’s largest producer of, erm, potash, a type of potassium-based fertiliser, controlling 20% of the market. And with the developing world – particularly China – ramping up its crop production to feed its population and its animals, the chances are that fertiliser (particularly the hard-to-get stuff like potash) is going to be in ever-greater demand.

Makes sense in theory – and after the recent rebound in commodity prices, the $188bn-valued BHP has plenty of cash to hand. But this is still going to be an awfully big bet on an area in which it has little experience, particularly if Potash succeeds in squeezing another $10bn or even $20bn onto the price tag. It's also likely to be politically sensitive, since Potash is a national champion and many of its assets are in Canada.

And however much sense the acquisition makes on paper, there’s always the risk that it might not work so well in practice. BHP has previously been criticised for its track record on deal execution – and based on the current level of hostility between the respective boards, it won't be able to count on an awful lot of goodwill at its new subsidiary if it does succeed in winning control…

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