BHP Billiton's Bid for Potash Could Spark Surge of M&A Activity in Agribusiness Sector

BHP Billiton's (NYSE ADR: BHP) $38.56 billion bid for Potash Corp. of Saskatchewan Inc. (NYSE: POT) is just the latest episode in what's likely to be a continuing surge of merger-and-acquisition (M&A) activity in the agribusiness sector.

Canada-based Potash, the world's largest producer of potash, yesterday (Tuesday) rejected an unsolicited takeover bid from the Australia mining giant, calling the offer "grossly inadequate."

The fertilizer company also quickly adopted a so-called poison-pill defense to fend off would-be suitors, though it said it would be open to a transaction if the price were right.

"The company isn't for sale, but we're not opposed to a [deal and] we certainly don't expect it to be stolen from shareholders," Potash Chief Executive Bill Doyle told The Wall Street Journal in an interview.

Tight global food supplies and a recovery in demand are driving acquisitions in the potash industry as producers snap up assets and expand capacity.

The global population will swell to 9.1 billion in 2050 from 6.8 billion, the United Nations' Food and Agriculture Organization said in September. Demand is rising for potash, a key component of most fertilizers, especially after the U.S. forecast a decline in wheat output last week because of adverse weather in Russia, Ukraine, and Kazakhstan.

Potash is the priciest of the three core components of fertilizer because supplies are limited – it is mined in only 12 countries. The company ranks third in production of the other two components: phosphate and nitrogen-based products.

Analysts said BHP is likely to come back to the table with a second offer and added that rival miners Rio Tinto PLC (NYSE ADR: RTP) or Vale (NYSE ADR: VALE) could also step in with a bid.

"It's only the start of the dance," Pierre Bernard, a fund manager at Toronto-based IA Clarington Investments Inc., which owns Potash shares told The Journal.

Others see the bid as part of a natural move by big mining companies to monetize their production skills and tap into long-term growth in the food sector, especially in emerging markets.

BHP in January agreed to acquire Canada's Athabasca Potash Inc. for about $331 million, while Vale this year spent $4.7 billion acquiring a controlling stake in Fertilizantes Fosfatados SA from Bunge Ltd. (NYSE: BG), as well as Bunge fertilizer assets in Brazil.

"What is clear from this is that the potash industry is going to be consolidated by the mining industry," Paul Cliff, an analyst at Nomura Holdings Inc. in London, told Bloomberg News in a phone interview. "And that may happen a lot quicker than most people thought."

BHP Chief Executive Marius Kloppers said last year that the company intended to spend billions of dollars to develop its Jansen potash project near Potash Corp.'s mines in Saskatchewan.

But there are significant barriers to entering the business, the biggest being the seven years it can take to develop a new mine.

"They obviously must have decided they didn't want to wait that long," Doyle said.

Even though the deal is in limbo, investors expressed optimism by bidding up the shares of other companies in the fertilizer sector, looking for the next takeover candidate. Mosaic Co. (NYSE: MOS), a large producer of concentrated phosphate and potash was among the biggest gainers.

Gleacher & Co. analyst Edlain Rodriguez said Mosaic, being the second-largest producer, could be a takeover target because it has the scale to make an impact for a big acquirer.

"Given BHP's size and what they want to do with potash, the likely candidates are Potash and Mosaic, which could give them the scale that they need and they are going to have to pay up for both of them," Rodriguez told the Journal.

In fact, Money Morning Contributing Editor Peter Krauth predicted in a recent article BHP would be making a move on Potash, Agrium (NYSE: AGU) or Mosaic.

"Considering BHP's desire to be either No. 1 or No. 2 in whichever fields it chooses to play in, the odds are good that it has one of the big North American potash producers within its sights," Krauth wrote.

"In my view, you still have a chance to get in near the ground floor in the last sector to join the secular-commodities smorgasbord," he added. "Potash, Agrium or Mosaic could serve as the dessert to the ongoing commodities banquet."

The surge in agribusiness activity is symptomatic of a worldwide upward trend supporting commodity prices, as natural resources – from precious metals such as gold to fertilizer ingredients such as potash — are benefiting from the demand being spawned by robust growth in key emerging economies.

And the strategies companies are employing in an attempt to benefit range from outright buyout deals – such as BHP's proposal to take over Potash – to stepped-up export initiatives, like the one that Caterpillar Inc. (NYSE: CAT) has been employing with solid success.

The Peoria, Ill.-based Cat – the world's largest maker of construction equipment – just raised its full-year earnings projection because of the booming emerging-markets demand it's seeing for mining, energy and rail equipment. Cat's trademark black-and-yellow trucks, earthmovers and tractors are a ubiquitous sight at construction sites in every market on earth.

"You've got strong growth in India and China that provides demand for commodities," Caterpillar Chief Financial Officer Ed Rapp told Bloomberg News in a July 22 interview. "Most of the mining is happening in the developing parts of the world."

News & Related Story Links:

• Wall Street Journal:
  Potash Rejects $38.56 Billion Takeover Bid by BHP Billiton
  
• Bloomberg:
  Potash Corp. Rebuffs $39 Billion Takeover Bid From BHP Billiton
  
• Wall Street Journal:
  Shares of Fertilizer Companies Rally
• Money Morning:
  How to Profit From the "Fertilizer Wars"
• Bloomberg:
  U.S. Economy: Growth Slows as Consumer Spending Decelerates
• Money Morning:
  Drought Forces Russia to Ban Grain Exports
• Money Morning:
  Can Corn Prices Make a Comeback?

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