They came, they saw….

But will they conquer? The entry of the BHP Billiton fox into the PotashCorp hen-coop with a hostile bid on 17 August, valuing the company at $40 billion or $130/share, was not a surprise to industry analysts. The first speculative suggestion that the Anglo-Australian mining giant might take a look at PotashCorp had been made a full two years ago: indeed, some reports suggest that BHP Billiton had been preparing its move for fully four years.
BHP Billiton has given PotashCorp shareholders until 19 October to mull the bid on the table. Since the offer was set out, the parties involved have followed virtually a textbook pattern in such contested M&A activities: PotashCorp’s immediate riposte was the offer was unacceptably low and undervalued the company. Its shares duly began to gain value, reaching $149.50 in the week commencing 23 August. They were widely expected to make further gains that would prompt BHP Billiton to submit a fresh bid, only to slip back to $146 by Friday, 27 August. Financial analysts had earlier speculated that BHP Billiton would ultimately win the day with a revised offer of $155-160/share. Meanwhile, likewise in textbook manner, BHP Billiton adopted a poker player’s stance, indicating that no new bid was forthcoming and that it was offering a very fair price to shareholders.
The next step, again as per textbook, was PotashCorp’s reported search for partnerships with potential White Knights to stave off BHP Billiton. This was the case with the most recent contested M&A deal in the fertilizer industry, involving a three-way fight between Agrium, Yara International and CF Industries to gain control of Terra Industries. Vale of Brazil promptly denied that it had any interest in bidding for PotashCorp. While M&A stories tend to generate feverish excitement among commentators, the official stance that Vale has adopted appears plausible, as the Brazilian mining giant is currently preoccupied with absorbing the Fertifos operation in Brazil. It is also expected to spearhead the drive urged by Brazil’s President Lulas to accelerate the development of additional sources of phosphate and potash within the country. In this context, PotashCorp may seem a distraction too far.
Sinochem’s name is also mentioned as being keen to ensure PotashCorp’s continuing independence, above all from BHP Billiton, with whom the Chinese have experienced recent tense relations over iron ore contract terms. Sinochem and PotashCorp are partners in the Sinofert joint venture, in which PotashCorp holds a 22% stake. The prospect of some form of Sinochem stake in the supply of potash from Canada – its principal supplier of a resource which the country partly lacks – does have a certain merit. However, outright Sinochem ownership of PotashCorp appears unlikely as the group has recently extended itself financially through a spate of acquisitions of domestic fertilizer producers.
Could Rio Tinto mount a counter-bid? This company had itself been the target of an unwelcome take-over bid from BHP in 2008. As part of the price it paid to retain its independence, Rio Tinto sold off several assets, including its interest in the Potasio Rio Colorado potash project in Argentina and its Regina potash asset in Canada. Earlier this year, Rio Tinto CEO Tim Albanese stated that the company is interested in re-entering the potash business. He also confirmed that potash is one of the minerals that the Rio Tinto exploration team continues to evaluate. “Rio has always thought this a good mineral to be in,” he added. But is re-entry into the potash sector worth $40 billion? Rio Tinto appears to think not, at least in its public statements to date.
Another facet when a company strives to preserve its independence from an unwelcome suitor is the use of the “poison pill”. PotashCorp followed previous companies’ form by announcing a shareholder rights issue, designed to prevent anyone acquiring more than 20% of the company.
The story to date has followed textbook patterns of behaviour by the suitor and the take-over target. Ultimately, however, each M&A story is unique, reflecting such factors as the personalities of the CEOs involved, the attentions of the regulatory institutions, the possible effect on other companies in the same business, and not least, the expectations of the shareholders being courted.
BHP Billiton’s declaration that it will operate PotashCorp’s mines at full capacity if its bid succeeds has dismayed Mosaic and Agrium, which also operate potash mines in Saskatchewan and which partner PotashCorp in the Canpotex export consortium. They have identified a threat to the global market balance, whereby output is tailored with supply to ensure buoyant prices. In conjunction with PotashCorp, they could lobby Canadian regulators and politicians to block the take-over. Under the Investment Canada Act, a foreign investor is required to demonstrate that a deal brings a “net benefit” to Canada. Recognition of this threat may explain why BHP Billiton subsequently took a more conciliatory approach towards any post-acquisition production and marketing of potash.
Shareholders will have reached their decision by the 19 October deadline, but there is one more hurdle that BHP Billiton must cross before it can assume victory: the approval of the Saskatchewan Financial Services Commission. The head of the commission is getting prepared for the task ahead: “Buckle up, because it’s going to be a crazy ride,” he is reported to have told his wife. Financial and industry analysts around the world may be inclined to agree.