Canadians See Red Over Chinese Potash Takeover
Sep. 2 2010 - 5:54 pm
Realty is finally taking hold in the assessment of BHP Billiton’s hostile takeover bid for Potash Corporation of Saskatchewan, the world’s number one producer of the nutrient.
Investors in POT seemed to believe the stock price was going to the moon after news broke of the $38.6 billion offer, worth $130 a share. The stock jumped more than $31 on the NYSE on Aug. 17 after the bid was revealed, with an incredible 47.4 million shares changing hands. Prior to the BHP offer, volume rarely exceeded 10 million shares a day.
Speculators kept pushing the price higher over the next few days. On Aug. 23, POT closed at $150.20 after trading as high as $153.29 during the day. However, the buying frenzy began to give way to some sober second thoughts as the difficulties of finding an alternative to BHP became increasingly apparent. Canada Report contributing editor Tom Slee, who has been following POT closely for several years, predicted that speculation of bids from Rio Tinto and/or Brazilian mining giant Vale would prove to be groundless and that appears to be the case. Rio Tinto is still struggling to digest its acquisition of Aluminum Company of Canada (Alcan) at the peak of the market and Vale has shown no interest in getting into the potash business.
The latest buzz is that a Chinese consortium may step up with a higher bid, with the name of chemical giant Sinochem Group being mentioned as taking the lead on such a deal. But let’s be realistic. The idea of a state-owned Chinese company taking control of one of Canada’s most valuable resources is never going to fly.
The government of the Province of Saskatchewan served notice this week that it would take a dim view of any state-controlled entity swallowing Potash Corp. While not specifically mentioning the Chinese, Saskatchewan Energy Minister Bill Boyd told the media the interests of the people of his province “may not be aligned” with those of a government-controlled corporation. Specifically, there is concern that the priority of the Chinese would be to maximize production and drive down world prices in order to reduce the cost of domestic food production. Lower prices would mean reduced royalty revenue for the Saskatchewan government.
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Further complicating matters is the future of potash marketing agency Canpotex, which is increasingly worrisome to both the Saskatchewan and the federal governments. Cantopex, which also represents fertilizer producers Agrium and Mosaic, gives Canada genuine clout in setting international potash prices. BHP initially said it would pull out of the agency and sell the potash itself but recently indicated it may be prepared to back down on that if the sale goes through. That may not be enough to assuage the concerns in Ottawa and Regina, however.
The bottom line is there is not a chance that the Canadian government would allow control of Potash Corp. to pass to the Chinese. Cross that one off the list.
So will BHP end up bidding against itself by sweetening the offer in the face of the opposition from POT’s management and directors? Don’t hold your breath! Billiton CEO Marius Kloppers was quoted last week as saying he intends to be “disciplined” about the bid, which may be a signal that he intends to let it stand as is. In that case, it will only be a matter of time until the share price pulls back to around the $130 level with no other serious potential buyer on the horizon.
The result has been a sharp drop in Potash Corp.’s trading volume in recent days as speculators have pulled back. The share price has lost momentum and has never returned to the Aug. 23 high, closing on Wednesday at $148.55. Meantime, Potash investors have received official notice of the offer with a strongly-worded recommendation from the company to reject it.
Source: Forbes Intelligent Investing
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