Home > Mergers & Acquisitions > BHP turns hostile with $39bn Potash bid

BHP turns hostile with $39bn Potash bid

August 23, 2010

“BHP Billiton launched a hostile bid for PotashCorp on Wednesday, ignoring cries of undervaluation from the Canadian fertiliser group’s executives, as the mining company took its $39bn offer directly to shareholders.

Analysts and investors expect the bid to rise, despite the claim of Marius Kloppers, BHP chief executive, that the $130 per share offer was full and fair. ‘The investors are saying that $160 per share is the level at which they start listening,’ said a US mining analyst.

In the biggest bid of the year, there was no hint last night of any competitors coming forward with rival offers that would drive the price immediately higher. By opening its move at nearly $40bn, BHP erected financial barriers to entry that are insurmountable to all but a handful of global miners such as Rio Tinto, Vale, Aluminum Corp of China or Xstrata.”

Source: Financial Times, August 18, 2010

Observations:

  • BHP Billiton offers $39bln in cash. As the company has only $9bln in cash, over $30bln has to be borrowed. This will double the debt load of the company. Goodwill on the balance sheet of the new company will increase by $26bln.
  • Analysts suggest BHP might increase its offer to $150 per share. At a higher price, developing its own potash mines would be cheaper. Current share price of $149.7 supports this analysis. Potential synergies would allow a premium of close to 60% to pre-offer share price.

Implications:

  • Rio Tinto executives can relax if the deal is closed. Spending $39bln or more on PotashCorp signifies Marius Kloppers deems a take-over of Rio Tinto no longer feasible.
  • Vale and Sinochem have approached PotashCorp in order to assess opportunities of collaboration that would pursuade the shareholders not to sell their shares to BHP Billiton. Especially Vale, which is building its own fertilizer business, would clearly benefit from any deal it could strike with the distressed management of PotashCorp.
  • The strong move of BHP into potash demonstrates the material is becoming mainstream for diversified mining houses. For a long time, potash mining has been regarded a separate business. PWC included potash miners in its yearly analysis of the mining industry this year for the first time. With Vale and BHP Billiton holding a strong stake in the industry, more diversified miners might start looking for potash deals.

©2010 | Wilfred Visser | thebusinessofmining.com

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