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Never underestimate the power of a mutually beneficial swap – a Canadian man with a knack for publicity once turned a red paperclip into a house with just 14 trades. Hence the enthusiastic reaction on Thursday to the news that Germany’s K+S is to buy Morton Salt from Dow Chemical, pushing shares in both companies up by more than a 10th.
The US chemical company gets $1.7bn of much needed cash. Since the group was forced to honour an expensive agreement to buy Rohm & Haas last month, it has been looking for ways to raise funds fast. The sale will trim Dow’s $22bn of net debt ($9.5bn of which is a short-term bridging loan), and marks a good start to management’s goal of raising $4bn through disposals.
K+S, meanwhile, becomes the largest producer of salt for table tops and roads worldwide. And the price tag attached to jumping from third to first seems reasonable: six times current earnings before interest, tax, depreciation and amortisation. US-based Morton Salt is a mature business but a profitable one producing plenty of cash. And the valuation is less than that mooted as a possible take-out price for listed salt and fertiliser group Compass Minerals.
However the other reason for the purchase, reducing K+S’s reliance on potash from half to 43 per cent of sales, should serve as a reminder of the risks at the company’s highly cyclical main business. Potash prices have retreated from last year’s highs but are still elevated compared with long-term averages thanks to industry production cuts. The test ahead is whether the concentrated ownership of potash mines will be enough to stop miners trying to bring idle capacity into use by lowering prices. Choosing to invest outside this business sends its own signals about prospects in an industry still making outsize returns.
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