German potash supplier K+S AG rejected a 7.8 billion-euro ($8.7 billion) takeover offer from Canadian fertilizer producer Potash Corp. of Saskatchewan Inc., saying the bid is too low.
The proposed offer of 41 euros per share doesn’t reflect the value of K+S and is not in the best interest of the company, the Kassel-based potash supplier said in a statement on Thursday. The bid doesn’t reflect the rising value of the Legacy potash project in Canada, Chief Executive Officer Norbert Steiner said, indicating that a offer of at least 50 euros a share would be more appropriate.
The new Legacy potash project in Canada is scheduled to start production by the end of next year and reach 2 million metric tons of capacity from 2017 onwards. By proposing a takeover, Potash Corp. might be looking for a way to slow construction of the Legacy mine to cut excess capacity and support prices, which have fallen amid rising output, according to P.J. Juvekar, a Citigroup Inc. analyst.
Steiner said that while negotiations with the Canadian company have been on friendly terms, repeated requests for detailed information about Potash Corp.’s plans for the company as well as job security for employees received very general answers. Should a new offer be made, the supervisory and management boards would examine it in the same manner as they scrutinized the first, he said.
“We are rejecting the offer that we have on the table and that means in clear text that we haven’t dug trenches and gone into defensive mode,” Steiner said today at a press conference in Frankfurt.
Potash Corp. plans to analyze K+S’s response before deciding on its next move, according to two people familiar with the matter. The Canadian firm still sees the industrial logic for the deal and an opportunity to reach an agreement, they said. Potash Corp. said on June 25 that it made a “friendly” takeover bid, prompting shares of K+S to gain as much as 39 percent. The stock dropped as much as 2.7 percent today.
“K+S have left the door open, implying they would accept a bid of 50 euros a share,” Jeremy Redenius, an analyst at Bernstein said in a note to investors. The analyst compared K+S’s response to that of Syngenta AG after the Swiss chemical maker got a takeover offer from U.S. rival Monsanto Co. “The language is much less aggressive than we saw with Syngenta’s rejection of Monsanto,” said Redenius, who rates K+S market-perform.
The book value of Legacy is about 11 euros per share, Steiner said. Taking into account future earnings from the mine, it’s worth as much as 21 euros per share. That future value wasn’t reflected in the pre-offer stock price of about 29 euros, Steiner said.
“We believe Potash Corp. is trying to take advantage of the valuation gap to take over K+S and gain control over Legacy,” Steiner said.
K+S has invested more than 2 billion euros in the project and predicts the company’s earnings before interest, taxes, depreciation and amortization will rise to 1.6 billion euros by 2020, with Legacy contributing an average annual operating cash flow growth of more than 10 percent.
A takeover of K+S would potentially threaten jobs in Germany, Steiner said.
“The boards have not been suitably convinced by Potash Corp. that they have a sustained interest in continuing the fertilizer and salt businesses in their current form, which are strategically, technically and economically intertwined,” he said. “In Germany alone there are more than 30,000 direct and indirect jobs associated with the domestic raw material production and mining of mineral nutrients by K+S.”
Potash supply is highly consolidated, with the top three producers controlling more than half of world shipments. Prices for the crop nutrient, which farmers use to strengthen root systems and protect against drought, haven’t recovered from a plunge in mid-2013. That’s when Russian producer Uralkali quit a marketing joint venture with Belarus that controlled about 40 percent of global supplies.