Potash Chasing Russia as No. 1 in Israel Deal: Corporate Canada

Potash Chasing Russia as No. 1 in Israel Deal
Potash is stored in a warehouse at the Potash Corp. of Saskatchewan Lanigan mine in Lanigan, Sasketchewan, Canada. Photographer: Geoff Howe/Bloomberg

Potash Corp. of Saskatchewan Inc.’s proposed purchase of Israel Chemicals Ltd. would give it control of about 25 percent of global potash production capacity, making it the biggest producer and boosting sales to China and India.

Israeli Prime Minister Benjamin Netanyahu said yesterday he’s met with Potash Corp. Chief Executive Officer Bill Doyle and that talks about a sale to the Canadian company are continuing. The 86 percent of Tel Aviv-based Israel Chemicals that Potash Corp. doesn’t already own had a market value of about 53.2 billion shekels ($13.7 billion) as of yesterday, which would make it the largest agricultural chemical deal, according to data compiled by Bloomberg.

“It’s a transformative transaction that would vault them past the Russians into the No. 1 spot globally,” said Spencer Churchill, an analyst at Paradigm Capital Inc. in Toronto who recommends buying Potash Corp. shares. Demand for the crop nutrient has increased as farmers have sought to meet the world’s growing appetite for food, fiber and fuel.

The Israeli talks come almost two years after Doyle successfully fended off an unsolicited $40 billion takeover bid from Australia’s BHP Billiton Ltd. w Canada ruled the deal wouldn’t be in its national interest. Buying Israel Chemicals may face a similar test as it’s that country’s second-largest publicly traded company and the Israeli government holds a so-called golden share allowing it to block any deal.

Antitrust Issues

Potash Corp., the world’s second-biggest potash producer by output, may also face antitrust concerns in buying a competitor, according to Jason Miner, a Princeton, New Jersey-based analyst at Bloomberg Industries. The Canadian company last year accounted for about 20 percent of global shipments of potash, a potassium-based compound used to strengthen plant roots and protect against drought, second only to Russia’s OAO Uralkali, data compiled by Bloomberg show.

“The regulatory hurdles will be high,” Miner said. “People assign a low probability of an acquisition going ahead.”

Israel Chemicals dropped 0.2 percent to 48.50 shekels in Tel Aviv after climbing 5.2 percent yesterday. Potash Corp. rose 0.7 percent to C$40.45 in Toronto.

Potash Corp., which shipped 9.05 million metric tons of potash in 2011 and also produces phosphate- and nitrogen-based fertilizers, gets about half its revenue from North America. Acquiring Israel Chemical’s Dead Sea production capacity would boost sales to China and India, the world’s most populous countries.

Indian Exports

Israel Chemicals, which is controlled by the Ofer family’s holding company Israel Corp. and is the country’s largest company by market value after Teva Pharmaceutical Industries Ltd., sold 5.17 million tons of potash in 2011 for an 11 percent global share, according to data compiled by Bloomberg. Israel Chemicals sold about 37 percent of its 2011 output to India, according to Bloomberg Industries’ Miner.

Israel Corp. confirmed yesterday in a statement that executives at Saskatoon, Saskatchewan-based Potash. Corp. held talks with Netanyahu and government agencies about a “possible merger.” Potash Corp. said separately it “acknowledges” the statement and doesn’t intend to comment further on the matter.

As well as potential antitrust concerns, Netanyahu risks being criticized during upcoming elections for selling Israel’s natural resources and jeopardizing the Dead Sea’s ecology, Gilad Alper, an analyst at Excellence Nessuah Investment House Ltd. in Ramat Gan, Israel, said yesterday by e-mail.

Shrinking Sea

The Dead Sea is shrinking at the fastest rate since data-keeping started in the 1950s, according to the Hydrological Service of Israel. The accelerated decline has sparked calls for Israel and Jordan to stop fertilizer makers from siphoning so much of the sea’s water, whose therapeutic powers have attracted visitors since biblical times.

In addition to its Israel Chemicals interest, Potash Corp. holds minority stakes in Jordan’s Arab Potash Co. and Sociedad Quimica y Minera de Chile SA.

“We own them with a long-term goal of having a majority position in each one,” Doyle said on an Oct. 25 conference call. “I’ve said many times, this doesn’t happen overnight, but we think that they’re a very, very valuable part of our company, and it’s more than just the monetary value.”

Potash Corp. sold potash for an average of $429 a ton in the third quarter, 4.9 percent less than a year earlier. Potash sale volumes fell to 2.1 million tons, from 2.2 million tons.

Lowered Guidance

The company said last month that full-year earnings will be less than its earlier guidance because of reduced sales to China and India amid delays in renewing supply contracts. China, which has increased potash imports by rail from Europe, will probably agree to new terms by the end of this year, Doyle said Oct. 25.

Potash Corp. and Israel Chemicals’ production was at less than capacity last year, according to data compiled by Bloomberg.

“There’s a tension between Potash Corp.’s need to grow and the needs of all the potash producers to balance supply and demand,” Miner said yesterday in an interview. “If you grow organically you risk sparking a race for market share that can boost supply too fast.”

Israel Chemicals was established as a state-owned company in 1968 and the shares started trading 24 years later in Tel Aviv. As well as production on the shore of the Dead Sea, it owns Iberpotash, which produces potash from two mines in Catalonia, Spain, and Cleveland Potash, which operates the Boulby Mine in the U.K.

Golden Share

The government sold its controlling interest to Israel Corp. in 1995. It retains the golden share that allows it to block a takeover of Israel Chemicals by any party deemed as hostile and to protect the country’s natural resources.

Potash Corp. shares in New York have dropped 18 percent through yesterday since BHP made its takeover bid for the company on Aug. 17, 2010. The Canadian government blocked the proposal on Nov. 3 of that year on the grounds that the deal wouldn’t provide a “net benefit” to the country.

Uralkali has soared 60 percent in London trading in the same period while Plymouth, Minnesota-based Mosaic Co., the largest U.S. fertilizer producer, has fallen 5.9 percent in New York.

The irony of Potash Corp.’s ambitions for Israel Chemicals hasn’t been lost on Sadiq Adatia, the Toronto-based chief investment officer at Sun Life Global Investments Inc.

“From the perspective that Canada was worried about losing Potash to BHP, I can see Israel reacting the same way,” Adatia said yesterday in a telephone interview.

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