Potash Corp. Withdrawing K+S Offer Caps Year of Frustration

  • Canadian fertilizer producer cites lack of engagement with K+S
  • Probe said to stoke concerns over need for due diligence

Bit by bit, the daring, 7.85 billion-euro ($8.77 billion) deal Jochen Tilk was orchestrating began to fall apart.  

First, the chief executive officer at Potash Corp. of Saskatchewan Inc., the fertilizer giant Tilk runs, was stonewalled after months of courtship by the management of his German target, K+S AG, unable to persuade them to even discuss the merits of his 41-euro-a-share takeover proposal.

Then, the Canadian company learned the object of its attention was having trouble with German authorities over how it was disposing of debris, raising doubts about the possibility of making its bid hostile.

At the same time, the decline in potash prices prompted Tilk’s team to rethink the economics of the entire deal. By late Sunday, the course was clear: Potash was out.

Potash’s decision to walk away from K+S -- which had reacted to the bid coolly at best -- sent shares of the German company plummeting Monday by the most in more than 16 years. The deal would have helped vault Potash Corp. into a position as the world’s largest producer of its namesake crop nutrient by giving it production in Europe as well as control of K+S’s new Legacy project, the first greenfield potash mine to be built in Saskatchewan in almost four decades.

‘Strategic Logic’

Potash Corp. first approached K+S Chairman Norbert Steiner and Andreas Radmacher, a member of the company’s supervisory board, about a year ago to discuss a possible joint venture involving both companies’ Canadian potash operations, according to a letter addressed to the board Sunday that was obtained by Bloomberg.

"This concept was rejected outright by K+S management," Tilk wrote in the letter. Over the next 12 months, Potash Corp. floated several other cost-cutting concepts to K+S’s board, including “potash swaps” between Legacy and Potash Corp.’s operations in New Brunswick, according to the letter, all of which were rejected by K+S.

"None of the proposed concepts led to engagement by K+Smanagement despite the powerful industrial and strategic logic for both our respective companies, shareholders and customers," Tilk said in the letter.

German raid

Following those initial rebuffs, Potash Corp. made a takeover proposal on May 31. K+S rejected the bid, saying it undervalued the company. In August, the Potash Corp. came back with a revised offer that include guarantees of no site closures or firings for five years. That proposal was rejected, too.

Last month, word came of a raid on K+S premises in connection with an investigation by Thuringia state investigators and state prosecutor in the town of Meiningen into alleged illegal debris disposal. That stoked concern within Potash Corp. about the risks of pursuing a hostile offer without the benefit of due diligence, according to a person familiar with Potash’s decision to walk away.

A simultaneous slide in potash prices also influenced Potash Corp.’s decision to withdraw, said the person, who asked not to be identified because the matter was private. But it was K+S’s unwillingness to engage with Potash Corp. in any meaningful way that ultimately was behind the Canadian company’s move to end its pursuit of a deal, the person said.

‘Creates Clarity’

Potash Corp. said late Sunday in a statement it was withdrawing its 41-euro-a-share bid, citing declines in commodity and equity markets as well as the lack of engagement. K+S dropped to 23.36 euros in Frankfurt. Potash Corp,. rose 1.7 percent to C$27.42 ($20.95) in Toronto.

Michael Wudonig, K+S spokesman, said the investigation into debris disposal is ongoing. K+S maintains that the allegations are unfounded and the company continues to cooperate with the authorities regarding the matter, he said in an e-mail. A spokesman for Potash Corp. declined to comment on ending of the takeover offer beyond the company’s statement.

The withdrawal of the takeover offer will probably have come as a surprise to at least some investors. Just last week, Deutsche Bank AG’s asset and wealth management unit urged K+S management to start talks with its would-be suitor. And another K+S investor, Acatis Investment GmbH, said Sept. 24 it increased its stake, betting the stock was undervalued and that Potash Corp. would renew its offer.

K+S said in a statement Monday it remains steadfast that the unsolicited proposal from Potash Corp. didn’t reflect the fundamental value of the company.

“This step creates clarity. We are convinced that we can successfully develop our company based on a consistent implementation of our two-pillar strategy in the long term,” K+S’s Steiner said in a statement. “We are strong in potash and in salt.”

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