K+S says it’s open to merger, true value above 60 euros/share

The chief financial officer of K+S AG said his firm is not opposed in principle to a merger with Potash Corp. of Saskatchewan Inc., despite its total rejection of the US$8.6billion takeover proposal.

“Don’t get me wrong: We aren’t at all blocking a potential transaction,” chief financial officer Burkhard Lohr said on an earnings conference call on Thursday.

Potash Corp. is offering 41 euros ($59.72) a share, and K+S says that this is far too low. But the German firm also claims a takeover could be bad for its home country, as Potash Corp. could shutter domestic production.

If German politicians end up supporting that argument, Potash Corp.’s proposal may ultimately get blocked.

K+S argues that it is only logical for Potash Corp. to close its European mines. The potash market is oversupplied, and Potash Corp.’s Saskatchewan output is low- er-cost than what K+S has in Europe.

Potash Corp. says a K+S takeover would provide valuable diversification and that it has no plans to close any of the firm’s operations. To assuage concerns about job losses in Germany, Potash Corp. offered commitments to keep the mines open for several years.

K+S complained that these promises are not enforceable.

“Every promise has to be reliable,” Lohr said. “What we have received is not reliable.”

Lohr also indicated that there is antitrust uncertainty around this combination. The merged company would control more than 30 per cent of the potash market.

K+S reported solid second quarter earnings on Thursday. Operating profit was 179.2 million euros, up 14 per cent year over year.

K+S claims its true value could be north of 60 euros a share, far above the 41 euros Potash Corp. is offering.

One key point of contention is K+S’s Legacy project in Saskatchewan, which is under construction. In a video posted to its website this week, K+S said the $4.1-billion project is worth up to 21 euros a share. Many analysts believe that is far too optimistic.

Thus far, investors disagree with K+S’s lofty view of its valuation. The stock closed below 37 euros on Thursday, well under Potash Corp.’s offer.

Potash Corp. thinks that by biding its time, it will gain increasing shareholder support for its offer, according to sources. The company has not decided whether to launch a formal bid.

Earlier this week, Scotiabank analyst Ben Isaacson said any rejection by K+S’s board might be based on “emotional attachment” to the company.

“To preserve value for its own shareholders, we do not believe (Potash Corp.) should, or needs to, raise its 41 (euros per share) offer,” he said in a note.