Billiton’s Potash Bid Turns Hostile
Heavyweight FTSE 100 mining firm, BHP Billiton, has launched a hostile takeover bid for PotashCorp after the initial offer for the Canadian firm was flatly rejected as 'grossly inadequate'.
The rejection caused BHP’s share price to drop; a 2.4% decline followed news of the initial bid and this loss was compounded when the miner’s shares fell a further 1.7% after the hostile takeover bid was announced.
We look at the issues surrounding the deal and examine how the ongoing negotiations could impact upon the mining sector as a whole.
Another failed bid by BHP?
BHP Billiton’s last high-profile bid came in February 2008, when it attempted to take control of mining rival Rio Tinto – another FTSE 100-listed share. This too was a hostile takeover bid, after an earlier all-share deal was rejected on the grounds that it undervalued Rio. BHP ultimately withdrew the bid in November 2008 on the grounds that the global recession added too much uncertainty to proceedings.
This step earned BHP a reputation for fiscal prudence, but another failed bid might strain the company’s share price even further by suggesting BHP is unable to fulfil its long-term business objectives. However, many see the initial offer by BHP simply as an opening gambit. Market reaction to the bid suggests that PotashCorp was being undervalued by BHP; shares in the fertiliser producer shot up more than $13, to a level well above the premium initially offered by BHP.
A further cause for concern is that ratings agency Moody’s yesterday announced it was going to put BHP’s A1 rating on review, with the possibility of a downgrade in the future. Moody’s cited concerns over the $43 billion pool of debt funding that the miner is going to have to raise, not least if it wishes to complete an offer for PotashCorp. Given BHP’s size and standing, any downgrade could dampen investor enthusiasm across the mining sector.
PotashCorp’s ‘poison pill’ defence
One of the earliest and potentially most hazardous hurdles BHP will have to negotiate in its attempted takeover of PotashCorp is the so-called ‘poison pill’ defence invoked by the Canadian fertiliser giant. Although illegal in the UK, the tactic is widely used to fend off unwanted attention in other jurisdictions. The defence would allow PotashCorp to issue new shares at knock-down prices if any single organisation (in this case BHP Billiton) were to acquire 20% or more of the company, making it impossible for the Australian mining firm to build a controlling stake.
BHP’s CEO, Marius Kloppers, has understandably played down the significance of this obstacle, stating that his company’s bid would remain on offer long enough to satisfy the terms of the shareholder rights issue. However, PotashCorp has stated that the defensive move would remain in place for at least 90 days, which is 30 days longer than the offer period BHP initially put forward.
Pain threshold
Analysts are more or less unified in seeing value in BHP’s attempted takeover of PotashCorp. The UN’s Food and Agriculture Organisation expects the world’s population to reach 9.1 billion by 2050, with much of the expansion likely to be into arid locations. This could see an agricultural boom and the takeover of PotashCorp, which is the world’s largest fertiliser producer, would give BHP a huge amount of leverage in the industry.
However, while the $130 per share offer was snubbed, any offer above $150 is thought likely to dilute short-term earnings for BHP. The question for traders now is two-fold: will BHP raise the stakes and, if so, will investors see value even at the increased price?
While it seems likely that BHP will pursue the deal, the price they end up paying will depend largely on the level of interest from other potential buyers. With Rio Tinto touted as another possible candidate, a bidding war could prove expensive and see some downside in the UK mining sector as the costs of a takeover rise.
Take a position
Whatever happens next in the ongoing process of BHP’s attempted takeover of PotashCorp, it is likely to affect the financial markets. With IG Index you can back your view on proceedings and make tax-free* profits.
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Updated: 19/08/10
The above comments do not constitute investment advice and IG Index accepts no responsibility for any use that may be made of them.
* Tax law can change or may differ in a jurisdiction other than in the UK
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