Potash Corp Analyst Reaction

http://blogs.wsj.com/deals/2010/08/17/analysts-react-bhp-makes-a-move-for-potash/

“The Big Australian” is on the prowl, again.

Potash Corp. of Saskatchewan said it has received and rejected an unsolicited $38.56 billion takeover bid from BHP Billiton. Potash called the proposal from the cash-rich mining company “grossly inadequate” and not in shareholders’ interests. This for an offer that was a 16% premium to the company’s Monday closing price and for a stock that was up 23% for the year when the bid was revealed.

Below is roundup of analyst reactions to the offer:

Vincent Andrews, Morgan Stanley: “We are not surprised by such an offer given the confluence of the significant global interest in the potash industry (i.e., there are 8+ number of companies at present interested in greenfielding potash mines [developing new mines]) and that fact that equity valuations across the industry remain well below replacement cost [the cost of replacing an asset]. Given current equity valuations, we have long been skeptical that global players would want to: 1) Enter the industry through greenfielding when that action would increase the amount of production capacity in place; 2) Incur the cost of significant cost greenfield production when existing assets were available below replacement cost; and 3) Wait 5-7+ years to generate cash flow. This is not to mention that fertilizer fundamentals have materially (and we believe structurally) improved in the last two months as grain prices have rallied substantially.

“We are not surprised by Potash Corp.’s rejection of this unsolicited offer given that the offer is ~18% below what we believe is our conservative estimate of Potash Corp.’s replacement cost.”

P.J. Juvekar, Citigroup: “Given POT’s unanimous rejection of BHP’s offer, we believe this could be a long battle with a higher offer likely to emerge. A theoretical 30% premium to last night’s close (in line with average M&A premiums paid in the sector over the last 5 years) would place POT shares at $146/share. Our Metals & Mining team estimates BHP would be able to fund this out of debt and potentially also do a buy-back.” Juvekar adds that Vale is unlikely to make competing offer because the miner would not be able to finance “a bid of $40B+ without a huge equity component.”

Mark Gulley, Soleil Securities: He expects higher bids to materialize. He predicts that Vale and Rio TInto will join the fray. “The initial offer is way too low for change of control of the global leader, just a 16% premium over yesterday’s closing price, and we view the board’s rejection as appropriate. The shares are already trading at $140 pre-market.”