Canadian takeover target Potash Corporation is putting BHP Billiton (BLT) through its paces. BHP Billiton is trying to buy the Canadian company for $39 billion. To keep us up to speed, Victoria Tait from Morningstar Australasia talks to Morningstar Senior Equities Analyst Mark Taylor about a recent independent evaluation of the BHP offer, the remaining challenges, the likelihood of a successful takeover, and the key takeaways for investors.
Victoria Tait: Canadian takeover target Potash Corporation is putting BHP Billiton through its paces. BHP Billiton is trying to buy the Canadian company for $39 billion. To keep us up to speed, we have Morningstar's Senior Equities Analyst, Mark Taylor.
Mark, welcome back.
Mark Taylor: Thanks, Vicki.
Tait: Mark, this deal has so many twists and turns, what's the latest?
Taylor: Well, the Saskatchewan provincial government has commissioned an independent group to evaluate the pros and cons of the deal, and it has actually come out quite favourably for BHP.
One of the few drawbacks that was highlighted in that assessment was that there might be some deferred payment of taxes to the local government, $2 billion worth over the life of the project, which seems very, very small in the scheme of things. And BHP has more recently and rightly pointed out that it’s a deferment of tax—it’s not a loss of tax to the province. And also within the report there were some very positive things said about BHP in terms of that they would be a good corporate citizen, and that they would be operating in the best interests of the local province, and also that they would be a far better candidate than a potential counter-bidder in Sinochem—for whom the profit motive might not have been as high on the agenda as for a company like BHP.
Tait: Has Potash Corp. responded to the independent findings? I would imagine it's not exactly what they wanted to hear.
Taylor: I don't believe that they have responded specifically to the report as yet. I’ve no doubt that they will come out with something because they have been very hostile to the bid from the word go, so it would be hard to imagine that they wouldn't. But I don't really see a lot in there that they could attack to any real detriment to the chances of the bid proceeding anyway.
Tait: Mark, what hurdles remain for BHP Billiton to get this deal home?
Taylor: Well, firstly, it has to get regulatory approval. So it has to go through the equivalent of Canada's ACCC, and I would suggest there’s every likelihood that they will give it the tick, and then, of course, it has to get through Potash shareholder scrutiny. One of the difficulties there is that there’s a poison pill structure in Potash, and if any one party looks to be gaining too much of a stake in the company then there can be this automatic issue of shares that are discount to existing shareholders that would preclude…would worsen the deal to any potential bidder, potentially to the point where it makes it unpalatable.
I mean that can be erased if Potash shareholders vote against that from occurring, but for that to occur they have to get the deal put in front of them, and Potash directors seem to be doing everything they can to prevent that from happening.
Tait: Mark, where is Sinochem in all of this?
Taylor: It's all a lot of hearsay rather than facts when it comes to a counter-bid from the Chinese, but where there’s smoke, there’s fire, and it would seem that there is every likelihood that Sinochem is the prime contender to be putting some sort of a counter-bid together. But because of the perceived conflict of interest—the Chinese company perhaps just wanting to produce potash for the sake of producing potash, lowering the price rather than producing for profit—it’s almost vital for them to have Canadian involvements in any bid that they've put on the table. So, that's most likely to be Canadian pension funds and word has it that that hasn't been all plain sailing. They haven't been swamped in people running to be involved in it. So, time will tell, but as it stands there’s nothing firm on the table, that's for sure.
Tait: Now, BHP Billiton already has the Jansen development in Saskatchewan, where is that at?
Taylor: Well, the preliminary assessment of the project has come out very favourably. The economics look good. It looks like it’s viable. So the project is likely to proceed to full definition very soon. It's probably in reality not that far from BHP formally ticking off on it and it will be a go-er for the company.
Tait: Would the successful acquisition of Potash Corp. make the Jansen development more economically viable for BHP?
Taylor: Absolutely, because then that project is piggybacking on the existing infrastructure that Potash Corp. brings to the table. So, really then you’re just mining product and putting it into existing infrastructure to a large extent. It's a huge leg up, if you don't have to build that.
Tait: Mark, I know nothing about this deal is engraved in stone yet, but what can investors take away?
Taylor: Well, I think, one positive for investors is it doesn't look like there's going to be too much competition for BHP in this space, and if there is it’s only likely to be one and probably a Chinese company. I think they can relax; I don’t believe BHP will pay over the odds for this. I think this is another example of an iron in a fire as it were. They’ve put this bid on the table. If it works at the price, well and good; if it doesn't, then BHP in the past has shown that it's more than comfortable to walk away from deals that don't make sense.
Tait: Thank you for your time today, Mark.
Taylor: Thanks, Vicki.
