Home > CFA L2, commodities, equities > What is the potential takeover price of Potash Corp?

What is the potential takeover price of Potash Corp?

Background: BHP Billiton, the world’s largest base metals miner made a hostile offer to acquire Potash Corp of Saskatchwan – the world’s largest potash miner by production capacity for $130/share all cash. The offer represents a 16%-33% premium depending on which reference price you look at (prior day’s close or volume weighted average price over 30/60 days).

Yesterday, POT shares opened at $142.84 on the NYSE or at ~10% premium to the takeover offer.

Many analysts have reassessed their price targets and published the potential takeover price. Here I would like to summarize the various takeover prices with the relevant analysis and links

CIBC World Markets –  estimates of potential takeover target price based on Potash Corp valuation using couple methods:

Method 1 – Takeover price as a multiple of Net Asset Value. Target = $152.

Source: CIBC World Markets

Method 2 – Price based on multiple of recent deals in the base metals sector. Target = $159

Source: CIBC World Markets

Ambrian report based on BHP’s balance sheet position (via FT)

We estimate BHP could pay up to $60bn in cash before a deal would become earnings neutral,” said Liberum analysts. “But we cannot see BHP being forced to pay such a premium given the negligible interloper risk

At $60bn in cash, POT would be valued at about ~$200/share (60 billion / 297 million outstanding shares) or ~36% premium to yesterday’s close of $143.

At $45 bn, POT  would be valued at about $151.5 or a 5% premium over yesterday’s close of 143. As I write this, POT is already up ~3% today at ~$147. The market is clearly expecting a higher bid for Potash.

Macquarie Capital via Bloomberg – Target = $160-$165

This is clearly the opening shot and we believe BHP is both willing and clearly able to pay more,” Duncan McKeen, an analyst at Macquarie in Montreal, wrote in a note today. “We expect the positive momentum in fertilizer equities to continue”

Most analysts are dismissing a the potential for rival offers since there are only a handful of mining companies with an appetite to gobble a $40bn acquisition… here is a short list:

  • Rio Tinto
  • Vale Inc
  • Consortium lead by China Investment Corp (China’s sovereign wealth fund)

BHP is taking the offer directly to Potash sharedholders and has set a deadline of Oct 19th… lets hope the acquisition goes through…

Note: All prices are in US Dollars. Potash trades on NYSE in US Dollars and on the Toronto Stock Exchange in Canadian Dollars.

Update: More analysts raise price targets via Barrons

UBS Securities analyst Brian McArthur this morning raised his price target to $170 from $120, including a higher multiple on Potash’s potassium production of 10 times, rather than 9 times, because the business is going well, and adding on a 35% premium for “control of tier one assets with large optionality.”

Deutsche Bank’s David Begleiter raised his price target to $150 from $110, “to reflect a minimum acquisition price,” adding that he wouldn’t rule out a purchase price as high as $175, given that POT seems the only reliable  The consolidation of the fertilizer industry is underway, in Begleiter’s view, with not just the BHP bid but also talk that two Russian firms, Silvinit and Uralkali, may merge, resulting in the world’s second-largest potash producer after Potash. Despite the higher target, Begleiter maintains a “Hold” rating on the stock.

Credit Suisse’s Elaine Yip raised her price target to $150 from $127 while maintaining an “Outperform” rating on the shares, using a valuation of $400 per ton of potash over the long term. The stock could garner more than $150 a share, given that it has the capacity to produce 17 million tons by 2015. The question is BHP’s ability and willingness to go higher. “Our Australian colleagues believe BHP could increase the offer to a 50% premium ($163/share) and still be 1% accretive in the fourth year with gearing (debt) reduced to 21% by 2013.”

I’d note too that Soleil Securities’s Mark Gulley and BMO Capital Markets’s Ed Chee both have a $160 price target on the shares, while Citigroup’s P.J. Juvekar has a $170 price target.

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