K+S investors see PotashCorp deal within reach despite rebuff

Frankfurt | Reuters — Shareholders in takeover target K+S say a deal could be done because suitor PotashCorp’s main aim is to get control over its German rival’s ambitious Canadian project and scale it back.

K+S’s Legacy mine, being built northeast of Moose Jaw near Bethune, Sask., would be the first built from scratch in the global potash industry in almost 40 years.

It would also add to an already oversupplied market where demand is suffering from weak emerging market currencies and low crop prices.

Saskatoon-based PotashCorp could more easily ration global supply by controlling K+S, but still commit to leaving its German operations largely intact. The potential threat to K+S’s domestic operations were seen as one reason why German regulators might block a deal.

K+S last week rebuffed PotashCorp’s 7.9 billion euro (C$11 billion) proposed bid of 41 euros per share as too low and suggested the suitor was planning to shrink the company.

Potash is in demand as a mineral because it plays a vital role in plant growth and crop resistance to cold and drought. Representing a market of about US$20 billion, it is one of three main nutrients used in synthetic fertilizers, alongside nitrogen and phosphorus.

K+S shares traded at 36.58 euros on Thursday and some investors and analysts say it is poorly placed to reach a market value of 41 euros per share under its own steam.

Suitor PotashCorp should be able to squeeze more value from K+S. According to J.P. Morgan, the German company has an 11 per cent market share, plus potentially about three per cent from the Legacy mine.

PotashCorp previously committed funds to boost its annual capacity to more than 17 million tonnes over the next few years from almost 11 million tonnes in 2015.

It is now reining in production amid a boost in supply from major rivals Uralkali and Belaruskali, who stopped collaborating two years ago.

Adding to downward pressure on prices, K+S plans to ramp up annual output at Legacy to two million tonnes by the end of 2017.

“One shouldn’t underestimate what this mine could do to the potash market. That’s the real reason for PotashCorp to take an interest in K+S,” said one German institutional shareholder, who recently bought shares in K+S and who asked not to be named.

Others following the takeover tussle agreed.

“The main rationale for the acquisition appears to be to prevent K+S’s Legacy from disrupting market prices as it adds capacity to the already oversupplied global and North American markets,” said Bernstein Research analyst Jeremy Redenius.

Another fund manager, one of the German group’s top 15 shareholders, said he believed a bid of around 43 euros could be the basis of an agreement.

To some degree, the market was appreciative of ChEO Norbert Steiner’s rebuff of the current proposal, but he should be wary of the potential stock price slump should PotashCorp walk away, the person said.

“It’s his job to let off a little steam,” the fund manager said.

However, several people familiar with the Canadian company said on Wednesday that it did not plan to sweeten its bid.

Thanks to restricted output of Canpotex — a North American export arm of PotashCorp, Mosaic and Agrium — the nutrient’s global price has remained well above the extraction costs of the industry’s most expensive mines, many of which are in Germany.

Canpotex commands over a third of the global potash production capacity with PotashCorp accounting for about half of that. Canpotex’s market share was seen at 29 per cent last year.

The shareholders added that PotashCorp — with its mind on the Legacy project — can afford to give guarantees for enough German jobs to placate politicians there as well as the target’s top management, which by law has to defend the interests of the entire company, not just its owners.

K+S has suggested that about 40 per cent of its German operations were at risk because PotashCorp has more cost-effective idle capacity in Canada. But the fund managers dismissed this as exaggerated, citing prohibitive shipping costs from PotashCorp’s main hub in Saskatchewan to Europe.

As part of a deal, however, PotashCorp could seek to bring forward the sunset phase of K+S’s two most depleted and most expensive mines in Germany, and replace some of the German potash shipped to Brazil with North American volumes.

About 20 per cent of K+S’s fertilizer products go to South America. Brazil, by far the largest market in the region, relies on Germany for 13 per cent of its potash imports.

Analysts say that any antitrust remedies linked to a deal would likely be surmountable but Brazilian authorities may pose the biggest hurdles.

Reporting for Reuters by Andreas Kroner and Ludwig Burger in Frankfurt; additional reporting for Reuters by Patricia Weiss.


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