BHP Shareholders Favor Buybacks to Potash Bid, Survey Shows
BHP CEO Marius Kloppers
Eric Taylor/Bloomberg
Marius Kloppers, chief executive officer of BHP Billiton Ltd.
Marius Kloppers, chief executive officer of BHP Billiton Ltd. Photographer: Eric Taylor/Bloomberg
The biggest obstacle to BHP Billiton Ltd.’s $40 billion bid for Potash Corp. of Saskatchewan Inc. may be BHP’s own shareholders.
BHP, the world’s biggest mining company, should spend money investing in its own mines, on buybacks or dividends ahead of acquisitions, according to 64 percent of the respondents to a Bloomberg News survey of investors. If he does proceed, Chief Executive Officer Marius Kloppers shouldn’t raise his hostile bid by more than 12 percent, according to the survey of 14 shareholders, who manage at least $115 billion in total.
“They are paying a full price,” James Bruce, fund manager at Perpetual Investments which manages the equivalent of $25 billion, including BHP shares, said by phone from Sydney. “M&A should always be measured versus the value accretion of buying back your stock. Versus Potash Corp., I’d prefer them to buy back” BHP shares.
More than half of the buyers in the 100 biggest takeovers during the last mergers-and-acquisitions boom from 2005 to 2008 lagged behind industry peers two years later, according to data compiled by Bloomberg’s ranking group. BHP’s Kloppers, 48, has said he will walk away from the biggest acquisition deal this year if it’s not in the best interest of shareholders.
BHP has fallen 4.4 percent in Sydney trading since its $130-a-share offer was announced Aug. 17. The cost of protecting BHP’s debt has risen 47 percent. Potash Corp.’s shares were little changed on Sept. 3 at $148.50 in New York. The shares of the Saskatoon, Saskatchewan-based company, the world’s biggest fertilizer producer, have advanced 32 percent since Aug. 16.
Prudential Plc’s $35.5 billion offer for an Asian insurance unit owned by American International Group Inc. fell apart this year when Prudential’s investors refused to support it, calling the price too high.
Fair Offer
BHP spokeswoman Amanda Buckley declined to comment and referred to Chief Financial Officer Alex Vanselow’s comments to the Australian Broadcasting Corp. on Aug. 29 when he said the offer was fair.
From the survey, five said mergers and acquisitions should be a priority for Melbourne-based BHP Billiton. The remaining respondents showed a preference for BHP to expand its own operations, buy back shares or increase its dividend. Ten proposed a limit on the Potash Corp. bid, with a median price of $145 a share, the survey showed.
BHP is paying 19.54 times earnings before interest, tax, depreciation and amortization, according to data compiled by Bloomberg. The level compares with the 4.71 median of 10 industry deals since 2002, the data show. BHP is trading at a forward price-to-earnings ratio of 9.77 times, while Potash Corp. is trading at 27.2 times.
‘Paying Much More’
“I wouldn’t want to see them paying much more, if any,” said Tim Barker, who helps manage more than $54 billion in assets at BT Financial Group, including BHP shares. “I’d want to be convinced before they increased it. It makes sense, it fits in there in the scheme of things, but it all depends on price.”
Potash Corp. Chief Executive Officer Bill Doyle, 60, rejected BHP’s hostile bid as “low-ball” and is seeking other offers. In May, asked about a potential BHP bid, Doyle said: “If anyone takes a run at us, it won’t be cheap.”
A purchase of Potash Corp. would be BHP’s biggest ever. The stocks of 53 companies that made the biggest purchases from 2005 to 2008 lagged behind industry peers two years later, according to data compiled by Bloomberg.
Return on Capital
“If they are going to be proven right that this is a good deal, five years down the track I want to see their return on capital,” Jason Teh, who helps manage the equivalent of $3.2 billion at Investors Mutual Ltd., including BHP shares, said in Sydney. The price is “rich to begin with,” he said.
According to Citigroup Inc. estimates last month, BHP’s return on invested capital for the transaction would range from 5 percent to 12 percent, depending on the potash price, asset sales and the acquisition price. The return on a buyback would be 18 percent, and a mining company purchase could be 10 percent to 12 percent, the bank said.
To gain control, BHP may need to offer $150 a share, Credit Suisse Group AG analysts led by Paul McTaggart said Sept. 3. A takeover at $130 a share will boost profit starting in the first year, while a $155 bid won’t add to earnings per share until the third year, the analysts said.
Chinese Competition
BHP may face competition from Chinese bidders, JPMorgan Chase & Co. said last month. Sinochem Group, China’s largest fertilizer trader, made initial inquiries with Potash Corp.’s board last month about the possibility of holding talks, a person with knowledge of the matter said Aug. 23.
BHP arranged a $45 billion loan, and the company’s A1 rating, the fifth level of investment quality, is on review for a possible downgrade, Moody’s Investors Service has said.
The company reported last month that second-half profit doubled, enabling Kloppers to cut debt 41 percent to $3.3 billion and boost his final dividend to 45 cents a share, beating the 43-cent forecast of Deutsche Bank AG and Macquarie Group Ltd. The next interim dividend may be 48 cents, according to data compiled by Bloomberg.
“My preference is for them to increase dividends,” said Rob Patterson, who helps oversee the equivalent of $3.3 billion at Argo Investments Ltd. in Adelaide, including BHP shares. “They have got to do a bit of everything but we would like them to think increased dividends.”
To contact the reporter on this story: Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net
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