In the battle for Potash Corp., domestic heroes are in short supply
ROME -- ereguly@globeandmail.com
We are bored with endless stories about the alleged economic recovery, about minor fluctuations in the GDP, the unemployment rate and the C-buck. What we need to shake us from our stupor is a blockbuster hostile takeover, one with all the requisite ingredients for a white-knuckle ride: Combative, mud-slinging CEOs, more twists and turns than a pulp detective novel and, most of all, rival bids to sate the greed of everyone from the quick-buck artists to the pension funds.
BHP Billiton's $38.6-billion (U.S.) bid for Potash Corp. of Saskatchewan is being promoted by the media and by glib investment bankers yearning for a fat payoff as just that sort of deal. BHP's bid is hostile and - fear not - a rival bid is coming, one with a price that will make the $130 a share offer seem mean. It can be no other way.
Potash Corp., the world's biggest supplier of nutrients for crop fertilizers, has rarity value. Take a pass on Saskatchewan's solution to the next food crisis and you miss out on a compelling, long-term growth play.
The fight for Falconbridge set the standard for hostile bids, an epic takeover battle that ultimately reshaped the entire Canadian mining industry. It started in mid-2005, when Brookfield puts its 20-per-cent stake in Falconbridge up for grabs. Xstrata, the great white shark of the mining industry, wrapped its jaws around it. Then Inco announced a friendly deal to acquire Falconbridge and create a home-grown mining giant. Xstrata came back with a hostile offer for Falconbridge while Inco was being pursued by Teck Cominco. If things weren't complicated enough, Inco recruited Phelps Dodge to help finance a higher bid for Falconbridge.
The battle lasted a full year. Xstrata ultimately won Falconbridge, but only by paying $62.50 (Canadian) a share, equivalent to a fat 2.2 times the price for the initial 20-per-cent stake. Inco, the loser, went to Brazil's Vale SA. Investors loved the bidding frenzy even if it meant turning the Canadian mining industry into a branch-plant operation. (In 2007, Rio Tinto bought Montreal's Alcan, leaving Barrick Gold and Potash Corp. as Canada's last mining superstars).
Since then, no mining deal anywhere on the planet has matched the Falconbridge saga for sheer drama and shareholder delight. BHP's lunge at Potash Corp. might change that. But don't get your hopes up. Potash Corp. is no Falconbridge.
Unlike Falconbridge, Potash Corp. seems more than willing to sell; it's just a question of price and $130 a share - a mere 16-per-cent premium - clearly won't do. CEO Bill Doyle could make $500-million if he unloads his company at rich premium. And BHP, the world's biggest mining company, is a motivated buyer. It's a believer in bulk and diversification.
BHP boss Marius Kloppers is under pressure to show investors that he is not a weenie. Since 2007, when he took the top job, he has been remarkably non-aggressive. BHP's strong balance sheet made it the only big mining company capable of paying dividends through 2009. In the 2008 crunch, it lost only 25 per cent of its market value (Rio Tinto lost 67 per cent, Xstrata lost 79 per cent).
If there were any company with the muscle to exploit cheap prices, it was BHP. It failed to pounce (at the height of the credit crunch in 2008, BHP dropped its all-share bid for Rio, a mistake in retrospect). Retreating from Potash Corp. could seal Mr. Kloppers's wallflower reputation. There is every chance BHP will win the company. It's just a question of bumping up the premium.
What about the touted rival bids? Don't count on them, either. From the onset, Rio was vaunted as BHP's potential spoiler. But that was news to Rio CEO Tom Albanese, who seems wary of getting into a takeover battle so soon after having gruesomely overpaid for Alcan. Recently, he told analysts that any purchases will be "in the single-digit billions." When BHP went after Potash Corp., Mr. Albanese was asked whether he had fertilizer on his mind too. "I'm not a farmer, I'm a miner," he said.
Vale also seems to have taken itself out of the running. Fertilizer is not Xstrata's cup of tea, and the industry's other possible contender, Anglo American, which is one-third BHP's size, is probably too small to take on a $40-billion-plus purchase. That leaves Chinese investors, such as Sinochem Group. It's unlikely, however, that any Chinese company would buy Potash Corp. outright because of the inevitable political backlash, not to mention the difficulty of competing with an all-cash offer.
The solution, of course, would be teaming up with a pension fund, perhaps Ontario Teachers' Pension Plan, to "Canadianize" the deal. There you go. If BHP is to have a rival bidder, and if Canada wants to save the last remnants of its mining industry, it will be up to a bunch of retired teachers to make the call.
Too bad Inco and Falconbridge didn't merge when they could. Together, they could have had the might to compete with BHP for Postash Corp. and provide the drama that this takeover attempt lacks.
