Chocolate and potash

Potash/Cadbury: Not much binds fertiliser and chocolate. But Potash Corp’s battle against mega-miner BHP’s hostile takeover bears a striking resemblance to the one British candy-bar maker Cadbury unsuccessfully waged against Kraft Foods a year ago. The similarities include a lack of competing bids, lots of political Sturm und Drang and antsy shareholders. Potash shareholders would be wise to consider how the Cadbury situation played out.

Like BHP, Kraft took its first offer for Cadbury directly to shareholders. Cadbury rejected the bid and arbitrageurs lifted the shares above the price on the table. The usual M&A defensive dance then kicked off, with Cadbury arguing its performance warranted a higher valuation, while at the same time searching for rival bidders.

Potash has followed the Cadbury script. It rejected BHP, is highlighting its merits (including robust third-quarter numbers on Thursday) and sent bankers roaming the earth for competing bids. But like Cadbury, which failed to drum up sufficient interest from Hershey or Ferrero, Potash seems to have exhausted its white knight chances.

The defence now rests on politics. Saskatchewan, the province that once owned Potash, has urged Ottawa to reject the offer under the Investment Canada Act, which requires that foreign investments are a “net benefit” to the nation. That has set off the horse trading.

To win Canada’s support, BHP has promised not to use losses from a potash project it’s developing to reduce its tax bill and to limit its target’s net debt to help protect provincial finances. Kraft, too, made promises, including at least one that it reneged upon, to appease British politicians, including cabinet minister Peter Mandelson, worried about a Cadbury takeover’s impact on jobs.

Canada could still block BHP next week. But politics aside, it’s hard to see on what basis. That would leave the decision to Potash shareholders. The Cadbury deal is once again instructive here. Kraft’s first bid came in at a 31 per cent premium. In the end, Kraft offered 50 per cent more than the company was worth before it tipped its hand. BHP’s first offer represented a 16 per cent premium. To match Kraft’s increase from first to final bid implies a BHP offer of around $155 a share, or some six per cent above the current price. The difficulty of BHP justifying that to its own shareholders may be the Achilles heel Saskatchewanians need to rely upon.