Will Potash’s Prince Ever Come?

This week, instead of introducing a new deal, we will take a look at what’s going on with BHP Billiton (BHP) and its marriage proposal to Potash (POT), especially in light of the recent twist in this dramatic saga: Sinochem allegedly dropped plans to place a counterbid!

Despite Potash’s insistence that the $130/share, $39 billion offering is “grossly inadequate,” and that BHP’s bid has “no traction whatsoever” with Potash shareholders, Sinochem, up until this point the most likely counterbidder, is no longer a potential White Knight.  Potash’s efforts at securing a different suitor have not gone so well, and the company may well have to suck it up or else face an exhausting fight to keep BHP’s hands off its assets.

Let’s not get ahead of ourselves. What has transpired since my last post?  A little regulatory drama, and of course Sinochem’s dramatic announcement.

At the end of September, Potash filed a lawsuit in a U.S. District Court in Chicago, claiming that BHP lied (okay, “misled”) in its takeover bid in order to depress Potash’s share price.  A federal judge is now allowing the discovery process to continue, which doesn’t mean a whole lot except that no one is yet stopping Potash in its efforts to shut the door on BHP. Of course, you can bet your bottom dollar that BHP isn’t too happy with this: in fact, as of the beginning of October, BHP plans to challenge this suit.

Potash recently adopted a poison pill to try to fend off BHP, but BHP simply extended its takeover offer to November 18th.  BHP claims that it extended the deadline in order to have enough time to submit supplementary information to the Canadian Competition Bureau, but some believe, including the New York Times’ Deal Professor Steven M. Davidoff, that BHP may just be biding its time, hoping that Potash’s share price will come off its highs in the $140s.  The Canadian Saskatchewan Financial Services Commission will probably not extend this 90-day poison pill, given that it’s already a longer time period traditionally allowed by Canadian regulatory authorities.

So, what can Potash do to fend off BHP? It could cry “antitrust” to its local Canadian regulatory authorities, but the U.S. has already given the go-ahead.  Besides, BHP would likely get rid of its potash property in Saskatchewan should it become a problem.

Enter politics.  According to a study released by the government of the province of Saskatchewan government in early October, Saskatchewan may face tax revenue losses of approximately $2 billion if BHP follows through with Potash, given that the acquirer pays taxes to Australia.

Seems good for Potash, right? Wrong. Potash is furious with the report because it argued that the Canadian authorities should be careful about blocking the deal because it may plunge Potash’s share prices and discourage future investment.  This is like a girl’s mother urging her daughter to accept a marriage proposal because otherwise, no one else will want her.  Pretty disheartening, at least from Potash’s perspective!

Potash may be out of luck.  According to the New York Times, Potash may not be able to adopt harsher takeover defenses, because Canadian securities law bars companies from taking such extreme measures.  Furthermore, if Potash were to solicit a minority stake investment, it would likely also be subject to Canada’s strict takeover defense regulations.

But wait, you ask!  What about a competing bidder, a White Knight that will sweep Potash off of its feet with a more impressive bid?  Sinochem allegedly hired bankers to address a potential bid, so it came as a surprise this week when the option fell off the table.  After all, Sinochem was reportedly working very “hard,” possibly even weekends (!), attempting to involve a potential Russian or Indian partner in order to avoid any objection by the Canadians to a huge Chinese bid for a company in its territory.

However, the Financial Times reported that negotiations between Sinochem and UralKali (URKA.ME), a Russian fertilizer company, failed. Rio Tinto (RIO) may step up, given its potential interest in the potash industry.  The Ontario Teachers Plan is also in talks with Singapore’s Temasek about a potential counterbid, so all is not lost for Potash.

Remember that report about losses in tax revenue released by the province of Saskatchewan?   It also sheds a harsh light on China’s intentions.  Canpotex, a group of Potash producers in Canada, including Potash, often stall production to keep prices and profits up, but China is ultimately interested in securing cheap potash, which does not jive well with Canada’s potash industry and its supporting politicians.  Remember, Sinochem is state-backed, and we know the Chinese government is very concerned about giving up control over a potentially valuable resource, which is why their surrender is awfully surprising.  They must have some trick up their sleeves.

Andrew Ross Sorkin wrote a great article in the past week called “Worrying Over China and Food,” and asked the pertinent question: “Do we really want the Chinese to control the company that has the largest capacity to produce fertilizer?” According to the article, Potash sells 45% of its product to North American farmers, and the Chinese would have to ability to redirect this product to China.

Despite this seeming bad news for Potash, the fertilizer company is still attractive in the eyes of any potential bidder, particularly BHP.  The potash industry is a small one, with three players, including Potash, possessing 50% of the market share.  Of these three, Potash is the only one not owned by another company or domiciled a politically heated country.  BHP should raise the price bar, but its own dual-company structure prevents it from easily issuing stock, which may force it to pay cash.

So, what does it all mean? Well, for one, we hopefully won’t have to worry about starving to death after our food is rerouted to China.  BHP also may be able to get its hands on Potash without paying too much more of a premium.  That ultimately remains to be seen, because Prince Charming often shows up when we least expect him.

Disclosure: No positions in the stocks mentioned.