Potash Corp. Has Shot at SQM After ’06 Bid for Control

Potash Corp. of Saskatchewan Inc. has the best chance in seven years of taking over Soc. Quimica & Minera de Chile SA as a stock slump and trading probe threaten to loosen the chairman’s grip on the fertilizer maker.

Chilean regulators accused Julio Ponce, the former son-in-law of dictator Augusto Pinochet, of enriching himself at the expense of other shareholders in the holding companies through which he controls Santiago-based SQM. Ponce, who fended off Potash Corp.’s 2006 attempt to wrest control of SQM, may become a more willing seller as a stock rout and further turmoil in the potash industry pressure his finances, said MBI Inversiones.

Potash Corp. and Ponce each own about 32 percent of SQM, which plunged 28 percent since late July. That’s left the $9.3 billion potash producer and exporter of iodine and lithium near its cheapest valuation in five years, according to data compiled by Bloomberg. While Potash Corp.’s own stock has dropped, purchasing SQM would allow North America’s largest fertilizer maker, with a market value of $27.5 billion, to fulfill its strategy of taking control of companies in which it holds stakes.

“Potash Corp. has always wanted to have control,” Sebastian Gazmuri, head of investment at asset management firm Sartor Investments in Santiago, said in a phone interview. “If they are still interested, today it’s a very attractive price,” even if there is more risk in the potash market.

Sartor held shares of SQM before selling them earlier this year, Gazmuri said.

Salt Lakes

A representative for SQM said the company had no comment on whether it would consider a potential offer from Potash Corp., while a representative for Ponce said he also declined to comment. Bill Johnson, a spokesman for Potash Corp., said in an e-mail that the company doesn’t comment on speculation about mergers and acquisitions.

SQM, Chile’s largest fertilizer producer, extracts the crop nutrient from salt lakes in Chile’s northern Atacama Desert. The company also produces iodine, used in X-ray equipment and LCD screens, and lithium, used in rechargeable batteries for smartphones.

Ponce was a director for Corfo, the government agency responsible for running SQM when it was state-controlled, and later built up his stake through state asset sales that Pinochet began in 1983. He converted SQM into Chile’s most profitable company and fended off a 2006 attempt by Potash to gain control of the company by signing a pact with Nagoya, Japan-based Kowa Co.

Stock Drop

SQM slumped after Russia’s OAO Uralkali and Belarus state-owned producer Belaruskali ended a potash trade pact on July 30 that underpinned prices of the crop nutrient. The selloff exposed the indebtedness of Ponce’s holding companies, forcing him to seek approval to raise more capital last week to avoid breaching covenants on debt backed by SQM stock.

At the same time, Ponce is facing a probe by Chile’s securities regulator, who has accused him of cheating fellow shareholders in the holding companies he uses to control SQM.

The decline in SQM’s stock sent the company’s enterprise value plunging to an almost five-year low in late August of 8.7 times earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. SQM was valued at about 10 times Ebitda yesterday, down from 25 as recently as 2010, the data show.

“A new window of opportunity might open for Potash,” Felipe Ruiz, an analyst at Banco de Credito & Inversiones in Santiago, said in a phone interview.

Buying Time

Today, SQM series B shares fell 5 pesos to 13,669 pesos. The company’s American depositary receipts rose 1.2 percent to $27.69, their biggest increase in about a month.

Even as Ponce bought time last week by winning shareholder approval for capital increases for his Norte Grande SA and Sociedad de Inversiones Oro Blanco SA holding companies, a protracted slump in the potash market could force him to sell as soon as 2015, said German Guerrero, partner at Santiago-based brokerage MBI.

“He doesn’t have the capital to sustain bad times for two, three or four years,” Guerrero said in a phone interview. “If he sees weak perspectives for SQM’s businesses, he would probably be willing to sell.”

Potash Corp. Chief Executive Officer Bill Doyle has said the company has a long-standing aim of acquiring majority control of four companies in which it currently owns minority stakes: SQM, Amman-based Arab Potash Co., Israel Chemicals Ltd. and China’s Sinofert Holdings Ltd.

‘Valuable Part’

“We own them with a long-term goal of having a majority position in each one,” Doyle said on an earnings call last year. “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. scrapped a takeover bid for Israel Chemicals in April amid opposition from Israeli workers and politicians.

“They take these stakes with the intention of eventually acquiring more of them over time,” Steven Hansen, a Vancouver-based analyst with Raymond James Financial Inc., said in a phone interview. “SQM has a fantastic set of assets in its own rights. The challenge from Potash Corp.’s perspective is, their stock is also off.”

Potash Corp.’s shares have plunged 16 percent since Uralkali abandoned the trade venture with Belaruskali. The company last week cut its third-quarter profit forecast as buyers of the crop nutrient deferred purchases.

No Rush

SQM, even after its declines, commands an Ebitda multiple that exceeds the median of 7 for fertilizer makers with market values of more than $1 billion, according to data compiled by Bloomberg.

That premium and the potential for it to shrink on any further regulatory developments could prompt Potash Corp. to bide its time rather than pounce now, said Eric Conrads, who manages about $750 million of Latin American stocks at ING Investment Management.

“With the premium that SQM is trading at, I just don’t see the environment to see this move right now,” Conrads said in a phone interview. “Knowing that your partner has got issues, it’s not like you are in a rush.”

Ponce, after shoring up the umbrella companies, may be reluctant to give up a company he has helped to build, said Leonor Skewes, a Santiago-based analyst at BICE Inversiones.

“For Ponce, it’s personal,” she said in a phone interview. “He’s not going to give up easily as he has from a young age formed this company into a $30 billion enterprise.”

Even so, should future financial difficulties force Ponce to sell, “the best buyer would be Potash Corp.,” Skewes said.

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