Potash has seen wild changes in price over the past three years, ranging from $200 to $1,000. It was driven higher by food shortages, but pushed down during the recession as farmers moved to less expensive fertilizers. Potash prices are now rebounding, sitting around $375 as of 19 August, 2010. This photo shows mill manager Josh Wheeler examining a pile of processed potash at the Mosaic Potash mine storage facility in Colonsay, Saskatchewan.
The countdown is on for Potash Corp. of Saskatchewan to find an alternative to rival BHP Billiton Ltd.'s $38.6-billion (U.S.) hostile offer and the chances of a realistic rival emerging appear to be growing thin due to the extraordinary amounts of debt and equity any suitor would need to raise.
Potash Corp. chief executive officer Bill Doyle said in an interview with The Globe and Mail last week that another bid is coming, and the company is talking to a wide-range of potential bidders, citing sovereign funds, private equity and Canadian pension funds as possibilities.
He requested more time to let the bid process play out, signalling his backup plan won't be revealed until closer to BHP's bid expiration deadline of Nov. 18.
Potash Corp. needs the extra time to try to find a white knight. It is understood the company is having trouble finding a bidder that can not only clear the huge financial hurdles to beat BHP, the world's largest miner, but receive the crucial nod from Ottawa, which is not expected to approve easily the sale of one of the country's last remaining mining giants.
For instance, Chinese chemical conglomerate Sinochem Group, considered a lead contender for a rival bid, won't proceed with a bid unless it receives positive assurances from the Canadian government a consortium offer led by a Chinese state-backed enterprise will be fairly considered and not dismissed outright by Ottawa, sources told The Globe.
Another obstacle for a rival offer is financing. None of the managers at several hedge funds contacted by The Globe believed Potash Corp. would make a suitable leveraged buyout (LBO) candidate, or even be able to suffer through a recapitalization without jeopardizing its credit rating and capital expenditure plans.
The hedge fund managers said Potash Corp., with about $3.5-billion of existing debt, would be able to borrow at most another $7.5-billion of debt, taking the total debt load to about $11-billion, the equivalent of three times earnings before interest, taxes, depreciation and amortization (EBITDA). No bank would be willing to lend a resources company much more than three times EBITDA, they said.
Potash Corp.'s current market value is about $46-billion. Assuming an LBO were done at that price, whoever leads the deal would have to raise $35-billion in equity from investors (the market value less the debt). That would be significantly higher than any equity cheque written in any previous LBO, the fund managers said.
"An LBO is clearly financially impossible," said one London-based manager.
The fund managers also questioned speculation that Potash Corp. management might sell the nitrogen and phosphate assets as part of any recapitalization plan. They note the sales would trigger hefty capital gains taxes, as those assets have a book value of only $1.5-billion. The sale of Potash Corp.'s public equity holdings would also trigger tax hits.
It is also possible that the sale of the nitrogen and phosphate assets, plus the public equity investments, would require shareholder approval at a special meeting. Neither the sales nor a shareholders' meeting are likely to occur before BHP's bid is to expire next month, giving BHP's all-cash offer a considerable time advantage.
The comments came as two British newspapers, the Sunday Times and Sunday Telegraph, reported that Potash Corp. was considering a defensive move such selling off of its nitrogen and phosphate businesses and offering shareholders a massive dividend of up to $70 a share.
The Times also said in its report that the Ontario Teachers' Pension Plan pension fund and Singapore's sovereign wealth fund, Temasek, were prepping a rival bid, along with Vancouver-based miner Teck Resources Ltd. Teck denied the report.
"We are watching it from a distance ... and it is unlikely we would get involved in the Potash transaction," a Teck spokeswoman said on Sunday, reinforcing the comments CEO Don Lindsay made to The Globe last month.
A Teachers spokeswoman declined to comment on Sunday, as did a spokesman for Potash Corp.
Eric Reguly