Potash Corp. sets sights on German giant K+ S AG
Potash Corp. of Saskatchewan Inc. is chasing another big international acquisition, just two years after its last effort failed.
The Saskatoon- based company submitted a written proposal to buy German fertilizer giant K+ S AG.
According to reports, the offer is in the neighbourhood of US$ 8 billion. Potash Corp. told K+ S that it wants to conduct due diligence before making a formal bid.
“K+ S is currently assessing the available options,” the company said in a statement. It is highly unlikely the K+ S board will support this initial proposal.
Despite holding near- endless reserves of potash in its home province of Saskatchewan, Potash Corp. has overseas ambitions. In 2013, the company tried to buy Israel Chemicals Ltd., but gave up after running into political opposition.
Buying K+ S would give Potash Corp. its first major presence in Europe, which could have strategic benefits. The timing also makes sense, as the company is finishing off its US$ 8.4- billion expansion program in Saskatchewan and is generating major free cash flow that could be used for acquisitions.
A K+ S takeover would mark the first big move for chief executive Jochen Tilk, who took over from longtime CEO Bill Doyle last year. Tilk is viewed as a more conservative leader than Doyle, though he was involved in some large transactions at Inmet Mining Corp., his former employer.
The question is whether K+ S is the right target.
K+ S owns highly profitable potash operations in Europe, but they have been running for decades and are depleting fast. To offset that decline, the company acquired the Legacy potash project in Saskatchewan in 2011, and is currently constructing it. Legacy has faced major cost overruns, with the estimated cost now above US$ 4 billion. At current low potash prices, the mine would generate poor returns ( though Potash Corp. would not be concerned about the sunk costs).
“Based on where the current prices are, you wouldn’t want to invest in ( Legacy) on economics alone,” said Fai Lee, an analyst at Odlum Brown.
Potash Corp. may be able to wring some synergies out of Legacy by integrating the project with its other Saskatchewan operations. The company is also bullish on the potash market, and if prices for the crop nutrient rebound, Legacy would look a lot more attractive. Additionally, Potash Corp. may just like the idea of keeping a competitor out of Saskatchewan.
K+ S also has a salt business, which Potash Corp. could divest if it sees the division as non- core.
While Lee has concerns about K+ S’s asset base, he still thinks an acquisition could work well for Potash Corp. “It all depends on the price they’re paying,” he said.
Shares of Potash Corp. climbed 4.2 per cent to $ 39.33 in Toronto on Thursday, suggesting investors are open to the idea of a K+ S takeover. K+ S shares trade in Germany, where markets were closed before the news surfaced.
Potash prices have struggled over the past few years due to excess industry capacity and the surprise decision by Russian firm OAO Uralkali to disband a cartel- like marketing group in 2013. However, global potash sales rebounded to a record high last year. Prices have also drifted higher since early 2014, but remain far below the highs from last decade.
With crop prices low, it is no surprise that fertilizer companies are looking at consolidation. Nitrogen giants CF Industries Holdings Inc. and Yara International ASA held merger talks last year, but they broke off without reaching a deal.
Potash Corp. itself was the subject of a $ 40- billion hostile takeover bid from BHP Billiton Ltd. in 2010, but the federal government rejected the offer.