Should Potash Raise Its Offer For K+S?
Jul. 10, 2015 11:10 PM • POT
Summary
Potash’s takeover offer has been rejected by K+S.
There were contradicting reports about whether Potash will raise its offer.
Recent acquisition of Western Potash by a Chinese company might prompt Potash to raise its offer.
The most important reason for Potash to acquire K+S is to have more control over global capacity and control prices.
In late June, Potash Corp. (NYSE:POT) confirmed that it approached German rival K+S AG for a friendly takeover. POT offered euro 41 per share for the German company. The bid has already been rejected by K+S, citing the fact that it undervalues the company and the Legacy project. This morning contradictory reports came out. First it was reported that POT will raise its already generous offer. The second report though denied it. I noted a few days ago that a deal would make sense for Potash, given the current market environment. The question is whether the company should raise its existing offer, which as I noted has been termed generous by analysts.
According to Scotiabank analyst Ben Isaacson, Potash's offer for K+S shareholders is equivalent of winning a lottery ticket. K+S though thinks otherwise. Last week, the German miner said that not only was Potash's offer too low but the Canadian mining giant could also dismantle the company and slash jobs.
There is no doubt that one of the reasons for Potash interest in K+S is the latter's Legacy mine. As I noted in my earlier article, citing Scotiabank, K+S's cash costs at $230 per metric ton are one of the highest in the industry. Potash's cash costs per ton for the full year 2015 are expected to come in at $95 per ton. But the Legacy mine will have significantly lower cash costs once it goes into production.
But an even bigger reason for Potash to complete an acquisition of this scale is to increase its market share. The combination of Potash and K+S could control 27% of global potash capacity by 2017, according Scotiabank. Possibly more if Potash indeed dismantles K+S. Canpotex, which is a joint venture between three North American potash producers that includes Potash, would mine 44% of the global potash capacity by the same year. Considering that the biggest threat to the potash market right now is competition due to breakup of the Belarusian Potash Company (BPC) in 2013, controlling as much of the capacity as possible is crucial.
Potash producers, over the years, had been price makers as the market was essentially controlled by Canpotex and BPC. However, with the breakup of BPC, all that has changed. The most important players on the buy side, India and China, have more bargaining power. Indeed, both countries delayed signing their supply contracts this year as they negotiated on price. If Potash Corp. wants to continue to have a say over pricing, then consolidation is the only way forward.
A development this week might create even more urgency for Potash to complete a takeover. Western Potash Corp. this week announced that a Chinese company, Beijing Tairui Innovation Capital Management, acquired a 51% stake. The stake gives the Chinese company control over Western Potash. Tairui is investing C$80 million in Western Potash. The investment will help in bringing Western Potash's Milestone project into production. The project is in close proximity to K+S's Legacy project.
The acquisition of a majority stake in Western Potash highlights China's strategy, securing long-term supply at competitive prices. Indeed, the move would give China even more bargaining power in the potash market unless of course there is consolidation. In this scenario, Potash's acquisition of K+S makes even more sense. The question though is how much more Potash will be willing to pay, given that its existing offer is being seen as generous. In my opinion, raising the offer slightly would be beneficial for Potash in the long-term if it wants to maintain control over global supplies and support prices.
Disclosure: I am/we are long POT.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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