BHP's Kloppers Faces Pressure to Win Potash After Rio Plan Fails
BHP Billiton Ltd. Chief Executive Officer Marius Kloppers faces greater pressure to win a hostile $40 billion bid for Potash Corp. of Saskatchewan Inc. after scrapping his second deal with Rio Tinto Group in two years.
“Given you’ve had two transactions that they haven’t consummated, both relating to Rio, I think there is some additional pressure to actually get this deal done,” Paul Cliff, a London-based analyst at Nomura Holdings Inc., said by phone. “Towards the end, BHP are more likely to raise the offer to get the deal agreed by Potash management.”
Kloppers needs Canadian approval for the bid for Potash Corp., which has rejected the offer and started talks with third parties. BHP and Rio yesterday abandoned a plan to save $10 billion in costs by combining Australian iron ore operations, following opposition from regulators from Asia to Europe.
“We expect the collapse of this deal along with the uncertainty of the Potash bid to lead to likely further underperformance of BHP against the other major mining companies,” Heath Jansen, a London-based analyst at Citigroup Inc., said in a report yesterday. “The official cancellation is a negative for BHP.”
BHP fell 2 cents to A$41.16 at the 4:10 p.m. Sydney time close on the Australian stock exchange. The stock has declined 4.6 percent in Sydney this year, compared with the 14 percent gain for the 100-member Bloomberg World Mining Index. Rio dropped 0.5 percent. Potash Corp., the world’s biggest producer of the crop nutrient, declined 1.2 percent to $143.21 yesterday in New York.
It’s the second time Kloppers, 48, has failed to consummate a deal with Rio after scrapping a hostile $66 billion bid for the London-based company in 2008, citing economic uncertainty and Rio’s high debt. He spent $450 million on the Rio takeover, according to the company. He also outlaid $75 million on the joint venture, the Australian Financial Review reported without saying where it got the information.
“I hope my shareholders consider that my job is on the line if we do an acquisition purely for the sake of doing an acquisition,” Kloppers said on an Aug. 25 call with reporters, referring to the Potash Corp. offer. “I will be as disciplined on this bid as I’ve been on every other endeavor that we’ve been on.”
BHP’s most recent completed purchase was Athabasca Potash Inc. for about C$341 million ($335 million) in January this year. The Melbourne-based company also bought United Minerals Corp. NL for A$204 million ($202 million) in October 2009.
“BHP Billiton has nothing to show in terms of sizeable M&A despite once-in-a-lifetime value on offer during the crisis of the last two years,” Liberum Capital Ltd. analysts said in a note to clients yesterday. Abandoning the iron-ore plan, in which BHP had agreed to transfer $5.8 billion to Rio in a so- called equalization payment, may give the Australian company “greater financial flexibility,” Liberum said.
BHP should spend money on its own mines, on buybacks or dividends rather than acquisitions, according to 64 percent of respondents to a Bloomberg News survey of investors last month.
“You could say that having failed at the full Rio Tinto bid and now with the iron-ore JV, the CEO Marius Kloppers has failed to make his mark on the company,” Tony Robson, an analyst at BMO Capital Markets in Toronto, said by phone. “However, arguably it’s more important that he preserves shareholder wealth by being a sensible manager.”
The two companies agreed on the iron ore plan in June 2009, when Rio, battling high levels of debt, scrapped an investment from Aluminum Corp. of China in favor of raising $21 billion from a share sale and the joint venture. The deals allowed Rio to slash borrowings without selling bonds and stakes in its largest mines, defusing a backlash from shareholders and politicians.
A so-called Plan B, based on a separate agreement with the state of Western Australia to allow the companies to share infrastructure and blend ore is unlikely to proceed, UBS AG analysts led by Glyn Lawcock said today in a report.
“In light of the joint venture being terminated and the feedback from the regulators, we now understand that any attempt by BHP Billiton and Rio Tinto to combine their businesses, even if it were to be on commercial terms, would draw scrutiny from the regulatory bodies,” he said.
Potash Corp., based in Saskatoon, Saskatchewan, last week said it’s studying alternatives to BHP’s offer amid rising prices for agricultural commodities. Sinochem Group, China’s largest fertilizer trader and cited by analysts as a likely counter bidder, may struggle to get state financial backing for a takeover, two people with knowledge of the matter said Oct. 7.
BHP may raise its bid to about $150 a share to get management approval from Potash Corp., Nomura’s Cliff said.
“They could bid a lot more from a liquidity viewpoint, but where it will get pulled up is their investor base questioning the value of it, more so than anything else,” Andrew Keen, an analyst at HSBC Holdings Plc, said by phone.