Among agriculture stocks, the perennial rumor for a takeover candidate has always been AG pick Mosaic (NYSE: MOS) with its number-two position in the potash sector. The buyer was expected to be Brazil’s Vale (NYSE: VALE). Instead, last week we saw a hostile takeover of the largest potash producer — Potash Corp. (NYSE: POT) — but by BHP Billiton (NYSE: BHP).
BHP had been buying smaller producers in Canada, and after looking at the bullish demand prognosis for the long-term use of fertilizers, they went after the big fish. If anyone can pull it off, it’s BHP.
The $130 all-cash offer was higher than the market price on the day before the offer, but lower than what the price is at the moment — right now about $148. It is funny how the market was saying that POT was worth much less before the hostile bid, but now that the bid is on the table the company somehow is worth quite a bit more. If this is not a testament that markets are sometimes not completely rational, I don’t know what is.
POT’s defense is that as the number-one potash producer, they have a very valuable asset over the long-term — and this is true. They also came up with numbers such as a -2.8% annual return for BHP shareholders under Kloppers, BHP’s CEO, while POT’s CEO Doyle has returned 25% annually for shareholders.
But Kloppers took over BHP after the U.S. real estate market had already blown up and the losses were flowing into the global financial system. For anyone following the issue closely, it was clear we were headed into a bad recession. Doyle took over POT in July 1999 at the very onset of one of the biggest bull runs in natural resource prices in history. The comparison for the shareholder return in each CEO’s tenure does not pass muster, in my view.
Why is BHP bidding for the number-one player if they already acquired a smaller potash producer in Canada in the past year? Well, mostly because it is cheaper to acquire an operating company with reserves than search for new deposits and develop them. This has been the case in oil, copper and other resources for a while. And as long as the prices of equities do not adequately reflect the underlying values of reserves, it will add to the long-term imbalance in many natural resources as it discourages exploration.
Let’s also not forget that Kloppers tried to buy Rio Tinto (NYSE: RTP) in 2008, which has to be one of the stupidest-timed takeover moves in recent history — RTP shares traded at $132.69 that summer and as low as $14.18 in December that year. If the POT deal does not go through, that’ll be two strikes against the BHP CEO.
In fact, I like RTP more here as there is a valuation discount between the two and this could get dragged on for a while. Plus BHP trades at more than four times sales and book value, while RTP trades at 2.2 times both sales and book value simply because it had debt servicing issues and needs to fix its cost structure. For similar companies, BHP is more efficient, but you can look at it as an opportunity for RTP because it has more room for improvement.
One company that saw serious investor interest on the POT takeover news was none-other than Chilean fertilizer producer Sociedad Quimica y Minera (NYSE: SQM). POT has a 32% stake in SQM, as the company holds many valuable concessions in Chile; it is also one of the world’s top producers of iodine and lithium. Curiously, SQM is now a play on not only fertilizer, but also lithium battery technology, which is becoming a global rage. The shares are not cheap however, currently trading at 25 times earnings, but the company does offer supply of a rare mineral from a politically-stable jurisdiction — a rarity for lithium producers.
With such decidedly-positive demographic trends in emerging markets, I don’t see how fertilizer prices will stay low in the next five to 10 years.
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