Friday, October 29, 2010
BHP Billiton's hostile bid for Potash Corporation of Saskatchewan continues to provide interesting lessons for M&A buffs. You can’t underestimate the power of a hostile deal, especially a cross-border one with regulatory uncertainty, to raise enormous amounts of risks for both sides.
For Potash Corp this week has brought both good and bad news. The good news is, potash (the mineral) is in high demand, with Potash Corp reporting stellar quarterly profits. The bad news is that, in a weird twist not often seen in hostile deals, the stock of Potash Corp may not be trading as high as it should be (i.e. the fundamental value isn’t reflected in the current stock price) because of the uncertainty surrounding the BHP bid. In fact, Potash’s Q3 investor presentation spends much time driving home this point, providing a “hypothetical unaffected stock prince analysis” and honing in on the inadequacy of BHP’s offer.
Potash Corp investors that are hoping that as a result of the company's strong earnings BHP would raise its offer may not see that happening anytime soon. Recent reports indicate that, in addition to Saskatchewan, the Canadian federal and other provincial governments may get in the way of any possible takeover by a non-Canadian buyer. Despite the fact that BHP’s offer is likely too low at the moment in light of the improving trends in fertilizer prices, based on statements (“I think we're going to get screwed” ) by a source allegedly close to BHP, it appears raising the offer is not likely at the top of their list given the tense negotiations with the Canadian government. Of course, BHP issued a statement trying to distance itself from this comment, stating that "We have absolute confidence in the integrity of the Investment Canada process. We continue to have ongoing negotiations with the Investment Review Division, but we do not comment on these discussions in the media.” We will see on November 3rd when the Canadian authorities complete their review of the bid.
BHP and its management are under a lot of presssure with this deal. In addition to the problems they are encountering with the Canadan government, if they lose this deal, it will be the second big hostile deal that they have failed to complete in the last two years. Furthermore, losing out on the Potash deal will be painful and costly given the amount of resources they have devoted to it over the past several months.
In the meantime, Potash Corp’s CEO is also trying to calm things down, indicating that the company is looking for a white knight and has engaged in “very active conversations about alternatives to BHP’s hostile offer.” Given the way the things are going in Canada with the BHP bid, it will be interesting to see whether these other options involve foreign buyers.