Bill Doyle has been at Potash Corp. for more than 20 years, lately as CEO, meaning he probably knows more about fertilizer than any man on the planet. While you may not want to get stuck next to him at a dinner party - potash jokes don't travel well beyond Saskatchewan, oddly - you can assume he knows a thing or two about the direction of the fertilizer market.
To paraphrase him, it's going, up, up, up, which means that BHP bid, launched at $130 (U.S.) a share in August, should follow the same trajectory. Or so he argues.
Too bad it appears that another market - the investment one - has already priced in a trainload of growth at his beloved Potash Corp. Note that the shares, at $147, trade at about 13 times EBITDA (earnings before interest, taxes, depreciation and amortization). BHP's offer values the company at 11.5 times EBITDA, while comparable companies, among them Mosaic and CF, trade at upper-single-digit levels.
In other words, Fertilizer Boy has a problem. With the shares already trading at a rich multiple, BHP will not be motivated to boost its offer by much. Will it bump the bid to $140 or $150 a share? Possibly, if only because bidders typically throw a few bucks onto their opening offer just to show they're not mean-spirited tightwads.
How about $170? Mr. Doyle has suggested that's the minimum acceptable price, given Potash Corp.'s growth potential. In the absence of a rival bid, it's highly unlikely BHP will indulge his fantasies. BHP has shareholders and directors, too, and they're not employing CEO Marius Kloppers to offer fat premiums just because the guy on the other side argues he's getting ripped off.
But Mr. Doyle has also hinted - make that stated - that a rival bid or value-adding event of some sort is coming, just be patient. In a letter to employees earlier this week, he said: "We are evaluating several alternatives for our company - a process that is active and ongoing." On Wednesday, he begged politicians and shareholders to hold out for another bid.
What those alternatives are remain a mystery. A leveraged buyout or a recapitalization are unappealing, perhaps impossible, because the company has the ability to toss only another $7-billion or so of debt onto its balance sheet without triggering the rude attention from the credit rating agencies. A high credit rating is essential for Potash Corp. because it must finance expensive capital expenditure programs to expand its mining operations.
Potash Corp. could use the $7-billion to buy back its shares, a move that would please the hedgies, who are thought to own 10 per cent of the stock, 15 per cent tops. But what is the sense of buying shares that trade at 13 times EBITDA if that multiple is more likely to fall than rise, or if the debt taken on to pay for the buyback imperils the company's credit rating?
Which leaves the rival bid option. To read the international business press, rival bids, in the shape of a consortium led by China's state-owned Sinochem, loom like ships in the fog. They're out there, it's just not certain where. With only one month to go before BHP's offer expires, there is scant evidence that a consortium is taking shape. One report this week said Sinochem had tried to recruit NMDC Ltd., India's biggest iron ore company, for a joint bid. NMDC's chairman was quick to deny the report.
Meanwhile, Canada's pension funds, whose presence would be essential to "Canadianize" a Chinese-led bid, all the better to secure Investment Canada takeover approval, are showing little overt interest in saving the pride of the Prairies. Alberta Investment Management Corp. said last month that it wouldn't get involved. About the same time, the Ontario Municipal Employees Retirement System said it hadn't been approached by Sinochem (though it may have since).
The Ontario Teachers' Pension Fund is thought to have taken a pass, for the simple reason that Potash Corp. is too big. Teachers has about $100-billion (Canadian) in assets and a 2.5-per-cent investment limit, meaning it could, if it wanted, invest all of $2.5-billion in company with a market value of $47-billion (U.S.). And where would the consortium find the rest of the takeover loot? The wild card, if there is one, is the Canada Pension Plan Investment Board, which is thought to have had talks with Sinochem. But even the CPPIB is too small to fill the equity vacuum.
BHP has a firm offer, all cash. Mr. Doyle has a growth story that already seems baked into the stock. That's all he has, so far, and time is running out.
Eric Reguly