BHP target waits for 'big boy price'

BHP Billiton will not be allowed to "steal" Potash Corporation of Saskatchewan, the Canadian company's chief executive warned yesterday, describing the mining giant's US$38.5 billion ($54 billion) offer as grossly inadequate.

Bill Doyle said BHP would have to come back with a "big boy price" after its initial US$130-a-share approach was rebuffed. The offer represented a 16 per cent premium to Monday's closing share price of the world's largest fertiliser maker - a level that was dismissed by the PotashCorp board for ignoring its "strategic position".

In a letter to BHP's chairman Jacques Nasser, PotashCorp's board said the offer was highly opportunistic.

It added: "[The proposal] fails to adequately recognise the value of PotashCorp's premier position in the industry, the value of our planned capacity expansions and the value of our equity investments."

Last month, PotashCorp said its second-quarter net profits had more than doubled to US$472 million.

BHP confirmed its bid had been rejected, but refused to say whether it would make an improved offer. Any new approach would be made more difficult, however, after PotashCorp's board sanctioned a shareholder rights plan, or poison pill, designed to prevent anyone from gaining more than a 20 per cent holding in the company.

In a statement, the company said: "The rights plan is intended to ensure that in the context of a formal takeover bid, the board of directors of PotashCorp has sufficient time to explore and develop alternatives to enhance shareholder value, including competing transactions that might emerge."

PotashCorp published a letter from Nasser, headed as "strictly private and confidential" and dated 13 August, in which the BHP chairman described the offer as "attractive and which fairly reflects PotashCorp's value".

Doyle met his BHP counterpart, Marius Kloppers, last Thursday when the takeover proposal was made. PotashCorp's board decided to reject the offer after two meetings.

Mining analysts said they expected an improved offer from BHP. Michael Rawlinson, a director at Liberum Capital, said the company could offer as much as US$60 billion before the deal looked too expensive.

He said: "Potash has long been mooted as a target for BHP, and we feel it could have moved earlier - BHP's offer was made at a 40 per cent premium to Potash's average share price in 2009. That said, the offer has been made at a 45 per cent discount to Potash's all-time high.

"BHP can fund an offer entirely through debt, therefore it looks cheap - we estimate it can pay up to US$60 billion and still be earnings accretive.

"We expect BHP to return with a counter bid. However, it can afford to take its time since we do not see any interloper risk. To us the acquisition of Potash can only be done by BHP alone, and the only group BHP may find itself competing against is its own shareholders."

Potash is used as a fertiliser and is derived from potassium. BHP Billiton said in June that it sees potash as an ideal fit to its existing portfolio, and that it was keen to develop its existing Canadian assets.

Earlier this year, BHP announced plans to spend US$240 million developing its Jansen potash project in Saskatchewan. This was followed in March by the US$320 million acquisition of another Toronto-listed group, Athabasca Potash.

The Saskatchewan region holds more than half of the world's potash reserves.

News of BHP's offer for PotashCorp underlines the mining sector's renewed readiness for merger and acquisition deals.

- INDEPENDENT