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Last updated: August 18, 2010 5:58 pm
A hostile bid in fertile territory, or fertile minds getting carried away? Industrially, BHP Billiton’s $39bn offer for Canada’s PotashCorp makes some sense. Demand for potash – used to improve crop yields – is robust, and PotashCorp is the largest producer, with more than a fifth of global mineral fertiliser capacity. The key word is “producer”. BHP has ample potash exploration acreage of its own in the Saskatchewan basin, but getting its Jansen project to the production stage could take five years and, Morgan Stanley estimates, capital expenditure totalling $10bn-$12bn. Buying PotashCorp would bring forward BHP’s potash cash flows, and give it 30 per cent of the market. Nor would the acquisition be a stretch financially: the $45bn of debt lined up by BHP would lift the ratio of net debt to earnings before interest, tax, depreciation and amortisation to just 1.2 times.
Yet it is hard to escape the impression that BHP is overpaying. For one, its opening $130 a share offer represents a substantial 32 per cent upfront premium to Potash shares’ 30-day average, and is 46 per cent above their year low of $89 last month. The potash bull story peddled by Bill Doyle, the Canadian miner’s chief executive, was already reflected in its pre-offer share price. Further, BHP’s planned merger with Rio Tinto promised clear synergies – its potash foray offers few.
Still, Mr Doyle scents a higher price. But with bidding starting so high, an auction seems unlikely. A Chinese bidder may yet emerge. Rio however, fresh from selling its potash business to Vale, is unlikely to rustle up $40bn with memories of its Alcan debt pile still fresh. Vale at least has the financial firepower for a deal.
Tempting though it may be to pull off a flagship acquisition after failing to net Rio, and with the Pilbara joint venture looking shaky, Marius Kloppers, BHP’s boss, has no excuse to become undisciplined on price. After all, Anglo-Australian miners have a patchy track record (hello Rio-Alcan) when it comes to buying Canadian companies.
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