Mining giant BHP Billiton Ltd. (NYSE: BHP) made an unsolicited offer to acquire Potash Corp. (NYSE: POT) for $130 a share that the Potash board immediately and unanimously rejected as “grossly inadequate.” The offer from BHP valued Potash at approximately $38.6 billion. Not only did Potash reject the offer from BHP billiton, the company’s board adopted a “poison pill” rule that prohibits any single investor from acquiring a stake greater than 20% in Potash.
BHP’s offer is putting a good deal of air under other potash producers as well. Potash Corp. shares closed yesterday at $112.15 and opened today at $143.11. Mosaic Co. (NYSE: MOS) shares are up around 9% in early trading, and shares in Intrepid Potash Inc. (NYSE: IPI) are up +8%. Other large miners with potash operations, like Rio Tinto plc (NYSE: RTP) and Vale S.A. (NYSE: VALE) are not getting the same size boost, up around +1%. The Market Vectors Agribusiness ETF (NYSE: MOO) is also up about +4%.
Aside from the BHP offer for Potash, the agriculture sector is in the midst of a sharp rise on commodity prices as well as equipment and fertilizer. The recent jump in wheat prices is only partially due to the export ban on wheat that Russia has imposed. Perhaps the biggest part of the rise is due to rising global demand for food.
Potash Corp. estimates that grain and oilseed consumption in 2020 will rise to more than 3 billion metric tons from an estimated 2.6 billion metric tons in 2010. Growth in fruits and vegetables consumption is also expected to rise by about +20% to more than 1.8 billion metric tons in 2020.
Fertilizer prices have been depressed since 2008, and are just coming out of the doldrums. BHP, which does have a large potash mining project on the drawing boards in Canada, does not want to wait the seven year! s it wil l take for the mine to reach production to cash in on the coming boom. That’s the attractive thing about Potash Corp. for BHP — it reduces the steep barriers to entry into potash mining.
The value of existing potash mines will only grow as the global demand for food rises. Mosaic and Intrepid could suddenly be worth a lot more than their current market caps simply because of their exposure to what are sure to be rising commodity food prices.
One final note: Russia, which produces more potash than any country other than Canada, is also moving to consolidate its potash mining industry by creating a global potash champion. Two Russian companies, Uralkali and Silvinit, are edging toward a fully merged company that could attract investment from Rio Tinto and Potash Corp.
Each side in this takeover try has fired its initial shot. BHP will probably have to raise its offer to stand a chance to get Potash to the table. The premium on the first offer was just 16%. BHP will have to weigh the price of waiting for its new potash mine against what it will cost to buy Potash. There are plenty of moves left in this game.
As of this writing, Paul Ausick did not own a position in any of the stocks named here.
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