BHP Billiton Makes Hostile $40 Billion Bid for Potash

BHP Billiton Ltd. Chief Executive Officer Marius Kloppers flew to Chicago to deliver the letter containing his $40 billion offer to Potash Corp. of Saskatchewan Inc. CEO Bill Doyle. The reply was a blunt rejection.

In explaining the Aug. 12 meeting on a conference call yesterday, Doyle, 60, said the “highly opportunistic” approach “grossly undervalues” the world’s largest fertilizer producer. Kloppers today took the $130-a-share offer direct to Potash Corp.’s shareholders, starting his second hostile takeover since 2008, when he failed to buy Rio Tinto Group.

“It’s all antagonistic, get under the skin of the opponent,” said Shaun Manuell, head of asset management at Equity Trustees Ltd., which manages the equivalent of $1.3 billion including shares in BHP, the biggest mining company. “Personalities always get involved in these sorts of things.”

Doyle, who’s worked at Potash Corp. since 1987, said he was “fully confident” of being able to compete against BHP after the Melbourne-based company agreed in January to buy Canada’s Athabasca Potash Inc. for C$341 million ($331 million). “BHP doesn’t walk on water,” he said. The two men are battling for top position in an industry where demand in Asia, Brazil and North America grew by 85 percent over the past 20 years.

Under Kloppers, a 47-year-old South African who holds a Ph.D. in materials science from the Massachusetts Institute of Technology, BHP has posted an annual return of minus 2.8 percent since his appointment in October 2007. Doyle, a graduate of Georgetown University in Washington, returned 25 percent annually since he became CEO of Saskatoon, Saskatchewan-based Potash Corp. in July 1999.

Biggest Bid

The acquisition would be BHP’s biggest since buying WMC Resources Ltd. in 2005 and follows the scrapping of its $66 billion offer for Rio. Kloppers, who today said the purchase would diversify sales, is seeking to benefit from surging demand for fertilizer as food needs grow. The global population is set to reach 9.1 billion in 2050, according to the United Nations.

“He’s offered a fair price for what is a 20 percent share of global production of this strategic commodity,” Tim Morris, an equities analyst at Wise-Owl in Sydney, told Rishaad Salamat in an interview on Bloomberg News Asia. Wise-Owl has a “buy” rating on BHP. “It’s very consistent with his expansion strategy of grabbing a larger share of commodities where he’s a price maker rather than a price taker.”

Kloppers joined South Africa’s Gencor Ltd. in 1993, which was later named Billiton Plc. BHP and Billiton merged in 2001.

Chicago Meeting

Doyle said yesterday he met Kloppers near Chicago on Aug. 12. Kloppers handed over a letter setting out the terms of the proposal and requesting a response by Aug. 18, according to a separate letter sent by BHP Chairman Jac Nasser to Potash Corp. Chairman Dallas Howe on Aug. 13 and posted on Potash’s website.

In May, asked about a potential BHP bid, Doyle said, “If anyone takes a run at us, it won’t be cheap.”

Rising food demand and adverse weather have driven up prices for corn, soybeans and wheat as much as 40 percent since June, and potash use may grow at least 10 percent next year, Doyle said. BHP, Rio and Vale SA, the three biggest mining companies, see fertilizers as a way to diversify away from iron ore and coal, Mark Gulley, an analyst at Soleil Securities Corp., told Pimm Fox on Bloomberg Television’s Taking Stock.

BHP Declines

BHP fell as much as 2.1 percent to 1,875 pence in London trading, and was at 1,878 pence as of 1:50 p.m. local time. Potash Corp. rose 2.5 percent to $146.70 as of 8:37 a.m. in New York. The stock yesterday jumped the most since listing in New York in 1989 to trade 10 percent above the offer, indicating Kloppers may have to raise his bid.

An offer of $130 a share values Potash Corp. at $39 billion, according to data compiled by Bloomberg, and is a 20 percent premium to the company’s closing price on Aug. 11. BHP today said its bid values the total equity of Potash Corp. at $40 billion on a fully diluted basis.

“This is clearly the opening shot and we believe BHP is both willing and clearly able to pay more,” Macquarie Group Ltd. analyst Duncan McKeen said in a report dated yesterday. The likely upper limit of bidding by BHP is $160 to $165 a share, he said. Possible rival bidders include Vale and Rio as well as buyers from Russia and China, Macquarie said.

Buying Potash Corp., owner of about 20 percent of global potash output capacity, would propel BHP to the top of the league of producers of the mineral, a form of potassium used by farmers to help boost crop yields by improving the ability of plants to withstand dry soil conditions. Potash is mined from natural deposits left by ancient evaporated seas in Canada, Brazil, Germany and the U.S.

Price Volatility

Investors can appreciate the potential for long-term demand for agricultural chemicals to grow, and as a consequence, can identify with BHP’s desire to move into this area,” said Angus Gluskie, who oversees $300 million including BHP at White Funds Management Pty in Sydney. “Investors also recognize that agricultural chemicals are notoriously volatile in price and they are yet to be convinced that the supply and demand balance in this area will prove to be sufficiently favorable.”

The cost of protecting BHP’s bonds from default rose the most in more than 16 months. Credit-default swaps on BHP jumped 26 basis points to 107 basis points as of 12:20 p.m. in London, the biggest increase since March 30, 2009, according to data provider CMA.

Potash Prices

Potash buyers in India, the world’s largest importer in 2009, agreed to pay $370 a metric ton for the year through March, down from $460 a ton last fiscal year. Doyle has said 2010 is a “recovery year,” with demand set to rebound as Chinese buyers, held back by bad weather, return to the market.

Moody’s Investors Service today placed the A1 senior unsecured long-term debt ratings of $11.8 billion of BHP debt on review for possible downgrade. BHP, which owns the Jansen potash project in Saskatchewan, would be better off not pursuing Potash Corp. because the cost of obtaining a deal looks too high, Citigroup Inc. analyst Clarke Wilkins said in a report.

“The size of the transaction is large and the execution risk is something that the market is probably nervous about, and that’s fair,” said Prasad Patkar, who helps manage about $1.6 billion, including BHP shares, at Platypus Asset Management Pty in Sydney. “The fact they’ve taken an M&A approach is a slight surprise, as opposed to their own organic route.”

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

To contact the reporters on this story: Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net; Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net.

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Source: Potash Corp. via Bloomberg

Potash Corp. Chairman Dallas Howe said in a statement the board “unanimously believes that the BHP Billiton proposal substantially undervalues Potash Corp. and fails to reflect both the value of our premier position in a strategically vital industry and our unparalleled future growth prospects.”

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Source: Potash Corp. via Bloomberg

Potash Corp. Chairman Dallas Howe said in a statement the board “unanimously believes that the BHP Billiton proposal substantially undervalues Potash Corp. and fails to reflect both the value of our premier position in a strategically vital industry and our unparalleled future growth prospects.” Close

Potash Corp. Chairman Dallas Howe said in a statement the board “unanimously believes that the BHP Billiton proposal... Read More

Photographer: Derick E. Hingle/Bloomberg

A Potash Corp. of Saskatchewan Inc. nitrogen and phosphate processing facility stands in Geismar, Louisiana. Close

A Potash Corp. of Saskatchewan Inc. nitrogen and phosphate processing facility stands in Geismar, Louisiana.

Photographer: Jack Atley/Bloomberg

BHP Chief Executive Officer Marius Kloppers said last August that his company would spend “billions of dollars” to develop its Jansen potash project in Canada, which is near Potash Corp.’s mines. Close

BHP Chief Executive Officer Marius Kloppers said last August that his company would spend “billions of dollars” to... Read More

Photographer: Chip Chipman/Bloomberg

Competitors including Intrepid Potash Inc., seen here, also advanced in pre-market trade. Close

Competitors including Intrepid Potash Inc., seen here, also advanced in pre-market trade.

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