Inside Wall Street: A Big Game-Changer for Potash Corp.

Hold your horses. The big story in the company with the unglamorous name, Potash Corp. (POT), has just started rushing out of the gate. The end-game? Potash, already the world's largest fertilizer producer, will be a much larger entity as a result of a brewing takeover battle. But that's getting ahead of the story.

By now everyone knows that Potash has rejected the unsolicited $38.5 billion buyout offer by BHP Billiton (BHP) as "wholly inadequate" and which "substantially undervalues Potash Corp. and fails to reflect both the value of our premier position in a strategically vital industry and our unparalleled future growth prospects." Indeed, some big Potash stakeholders who are familiar with the company's plans say it has been shopping the company to some potential suitors.

Taking Its Time

When I last wrote about Potash on Oct. 18, 2009, in BusinessWeek, I predicted that Potash may be a ripe takeover target for BHP Billiton and Brazil's Vale (VALE), another large mining company that also produces potash, among other commodities. I noted then that BHP had accumulated about $18 billion in cash, to be used mainly for acquisitions. I recalled that in 2008, BHP made an unsuccessful bid for a Russian potash mine owned by Eurochem Mining and Chemical, even after it had already acquired Canada's Anglo Potash. Also in 2008, BHP tried, again unsuccessfully, to acquire rival London-based Rio Tinto (RTP). It abandoned that quest when Rio Tinto put up a vigorous fight, and China, a major buyer of potash, also opposed BHP's takeover plan.

Those developments indicated to me that BHP was, indeed, seeking to further expand its stake in the potash industry, and Potash Corp. was its main target. Shares of Potash then (on Oct. 16, 2009) were trading at just $94. Partly because of BHP's bid of $130 a share on Aug. 12, the stock has rocketed to $150.

What happens now? The betting is that a higher offer will come before long, partly because some analysts and big stakeholders who know the company inside out are convinced Potash is worth $180 a share. They recall that in 2008, the stock traded as high as $230 a share.

"For BHP to get invited to the table as a serious bidder, it has to raise its offer to $151-$160 a share," figures Jesse Adelaar, portfolio manager at investment firm Peconic Partners, which owns shares. For sure, he adds, "there will be another bid on the table, based on the real value of Potash and the number of parties interested in Potash and its vast assets."

A Sweet Target

The increasing demand for food, such as corn, soybeans and wheat, is driving the accelerated rise in commodity prices, such as fertilizers and, consequently, is also boosting the price of potash. Continued demand for potash in such countries as China and India is fueling the jump in the price of potash. So Potash Corp. is, indeed, in the catbird seat, with about 17% of the global potash market.

Most analysts believe BHP is trying to buy Potash on the cheap. BHP's bid "doesn't take into account Potash's continued growth potential and, in our opinion, is not an attractive offer for Potash's shareholders," says John Chu, analyst at Mackie Research. He thinks BHP will submit an improved second bid -- possibly at $150 a share.

Who are in the running to potentially bid for Potash? One likely White Knight is China which, Adelaar believes, could join forces with Rio Tinto to launch its own takeover bid. He believes China needs to co-partner with a company like Rio Tinto to win the Canadian government's approval. However, Rio Tinto may encounter difficulty in forging such an alliance because Potash owns a 22% stake in China's largest potash producer, Sinofert Holdings. With its close connection with Potash, Sinofert appears a likely suitor, given China's perennial need for potash. Sinofert couldn't be reached for comment. Tony Shaffer, a spokesman for Rio Tinto, says the company doesn't comment on market speculation.

Other interested companies, some analysts say, that could also make overtures for Potash, include Brazil's Vale, and Canada's Teck Resources (TCK), one of the world's largest producers of zinc and metallurgical coal. Richard O'Reilly, analyst at Standard & Poor's, says there is indeed the possibility of a higher offer, but he also sees a chance that Potash could take the defensive route by buying another fertilizer producer to discourage any deal.

A Long Battle Ahead

But one thing is sure. Now that Potash is officially in play, the battle will be long. "We expect BHP's unsolicited bid for Potash to trigger a long takeover battle," says Hari Sambasivam of Canada's National Bank Financial. The analyst expects Potash to trade higher based on its "world class potash assets with long reserve life and low cash costs," as well as the potential of competing bids from other major global mining companies, such as Rio Tinto and Vale. The analyst on Aug. 18 raised his price target for Potash to $180 a share from $120, as he expects a protracted takeover battle.

From here on, expect Potash to trade more on the progress of the takeover battle rather than the fundamentals. "Given the recent outcome of M&A transactions within the fertilizer sector and overall improvement in the tone of the grain market, shareholders are likely to expect more," says Edwin Chee, analyst at BMO Capital Markets, who rates Potash as outperform. He increased his price target to $165 a share from $125.

To be sure, shares of Potash are hot and can only go higher from where it is now. And judging from the expectations of analysts and upbeat forecasts by some of the big stakeholders, the game has definitely changed -- for the better -- for Potash and its shareholders.