What's Potash Corp. worth? The answer may lie in Belarus

Deborah Yedlin,

The battle for Potash Corp. launched by Australian mining giant BHP Billiton calls to mind another hostile takeover battle waged in Canada several years ago - the one launched by Sherritt International and the Ontario Teachers' Pension Plan for Fording Coal.

As many will recall, what began as a hostile deal resulted in four companies and one large institutional investor ultimately coming together and creating the world's second-largest metallurgical coal producer.

It was something to be proud of - a Canadian company with a dominant global position.

The reasoning behind the deal was not unlike what was pursued when Encana was formed through the merger between Alberta Energy Company and PanCanadian Energy and more recently, Suncor 's merger with Petro-Canada: Bigger is better in order to compete on a global scale, not to mention ensure the resources remain in Canadian hands.

The BHP bid, like those for Inco, Falconbridge and Stelco in recent years, is going to effectively pit the market against what is in this country's best interest.

Once again there will be cries that the resource stay under Canadian control, as there were Friday when NDP Leader Jack Layton demanded that any sale of the company to foreign owners must undergo a comprehensive, open review to ensure Canada will benefit.

The argument against foreign ownership will undoubtedly be bolstered by the current lawsuit launched by the federal government against U.S. Steel, which bought Stelco and apparently did not adhere to the terms under which the deal was approved. Things haven't worked out so well with the Inco and Falconbridge, either.

Then there's the fact that if Potash disappears as a publicly traded entity, it means one less company of size in which institutional investors can take a meaningful position. Canada's premier stock exchange has seen its fair share of large-cap companies being acquired or merged away in recent years, leaving investors with a smaller universe of companies to buy that fit their particular mandates.

But there is much more to this story.

One issue, as indicated by statements from Potash chief executive Bill Doyle and the behaviour of the markets, is valuation. With Potash shares gaining more than $40 on the week to $156.21 by midday Friday, it's clear this battle is just beginning. And as the investment banker axiom goes, once in play, always in play. The question is how does it all end.

And that depends on price. Despite what Doyle said to BHP earlier this month - that the company wasn't for sale - the reality is much different. After all, this is a world where maximizing shareholder value - for better or worse - is what rules boardrooms and strategic plans. Every company has its price. The question is what is the Potash price?

Potash shares peaked at the lofty price of $244.03 in June 2008; the question is whether, with Potash reserves in apparent plentiful supply, there is long-term upside in the share price that management believes there is.

The argument for an upward trend in potash prices stems from the rising consumption of wheat and meat in the developing world that is expected to translate into greater demand for fertilizer in the coming years. The price peaked at $1,000 US per tonne in 2008, dropped as low as $200 and is now sitting at $375. Now, with grain prices expected to rise as a result of growing demand, potash is seen as undervalued.

That would explain why BHP wants to get its hands on the world's largest producer of potash, but also why the Russians are also making moves of their own to grab a bigger share of the market.

On Wednesday it was announced that the former head of Uralkali, a Russian potash producer with 10 per cent of the global market, had been named to lead rival Silvinit, the world's fifth biggest producer. Current speculation has it that Russia's endgame is to merge the two companies, which, along with Belarus' Belaruskali, would control 45 per cent of global potash production - second to Potash Corp.

It wasn't so long ago that Russia was using its oil and natural gas reserves to flex its muscles on the international stage. Today, with natural gas prices lagging, it appears the focus has now shifted to potash.

But where does this leave the hostile bid currently on the table? Certainly, a deal for Potash or a merger between Silvinit and Uralkali will provide a benchmark valuation for the commodity, which the market is clearly looking for.

No one should think for a minute that BHP has come out with its last and best offer: the initial bid of $130 in cash per share was but the opening ante. The same process unfolded with Fording back in 2002. For its part, in its quest to maximize shareholder value, Potash is reportedly looking for a suitable white knight to counter BHP's bid.

What's possible, however, in light of the fact there will be pressure to keep the resource under Canadian control, is that the situation may resolve itself in the form of a sizable investor coming to the table, buying something less than a controlling stake but big enough to function as a poison pill to ward off further takeover bids.

In the last two years China, through its various investment arms, has stepped up and made big investment in Canadian resource players - whether Teck, Syncrude or Penn West Energy Trust.

Given that it is the world's largest consumer of fertilizer - it may very well be interested in an investment that would garner exposure to the world's largest potash producer, not to mention potentially offset a measure of its own supply risk.


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