Pot luck

Potash: Potash Corp of Saskatchewan is willing to sell at the right price – and that’s higher than the $39 billion offered by BHP Billiton. A competitive auction is the Canadian target’s best bet in getting the fullest price. But the fertilizer group may struggle to get one going.

With less than $4 billion of debt, Potash Corp has other options. BHP has lined up more than $40 billion in syndicated financing to back its bid. The Canadian company could gear itself up and return cash to investors. But such plans have a mixed record at generating value for shareholders.

Alternatively, Potash Corp owns about $7.5 billion in minority stakes in several listed overseas companies. If executives believe the market doesn’t fully recognize how bright the future is for its products, it could borrow to increase its stakes in companies like SQM. This might make it that bit harder for BHP to swallow its quarry. But the idea of accumulating non-controlling stakes might not please Potash Corp’s investors.

The simplest defense is to convince the market that it’s worth more. Potash Corp is the biggest, lowest cost producer in a market with bright prospects. Furthermore, its shares are trading far below their 2008 peak. They closed on Wednesday nearly 15 percent above BHP’s initial offer price of $130 apiece, suggesting investors seem to be buying this storyline so far.

If it really wants to get top dollar, however, Potash Corp needs a counter-bidder. Yet there are few obvious candidates, especially given the price tag. Rio Tinto, for instance, is still digesting Alcan. Vale, in which the Brazilian government owns a stake, could find it difficult to get involved with elections looming. A consortium could be another option. But organizing such groups takes time - and BHP is hoping to force a shareholder vote within a few months.

It’s still possible that a counter-offer could emerge. Potential Chinese bidders such as Sinofert might be leery of jumping so heavily into cross-border M&A - and any bid could create political concern in Canada. Then again, although BHP is promising to run Potash Corp’s mines at full capacity if it buys the company, food and farming are intensely political areas. With a nod from officials at home, a strategic bidder from China or elsewhere just might join the fray.