By Alistair MacDonald in Toronto and Eyk Henning in Frankfurt
An attempt by Canada's Potash Corp. to buy rival miner K+S AG
and create a dominant potash player in the Americas faces likely
pushback from the German company and regulatory hurdles.
A tie-up between two of the world's largest potash miners would
create a company capable of controlling up to 30% of the global
market just two years after the collapse of a global cartel system
that had helped regulate prices of this key agricultural commodity
sent potash prices sharply lower.
But some analysts say a deal could be nixed by German federal
regulators, who stopped a similar takeover attempt in 1997.
Many analysts saw Potash Corp.'s approach as being driven by a
desire to re-establish greater control over a market once dominated
by two large trading groups.
Potash Corp. is "trying to re-establish its influence through
controlling more tons in the hope of trying to raise prices around
the world," said Joel Jackson, an analyst at BMO Capital
Markets.
A combination would control 52% of the North American potash
market and 42% of European supply by 2017, according to data from
Scotiabank.
"There is a recognition that the industry is at an inflection
point where there is a lot of supply coming," he said.
As new mines come into production during the next five years,
supply is expected to surge. Unless demand, especially in China and
India, increases as sharply as was expected when companies invested
in expansion, prices could suffer further.
K+S, Germany's largest miner, said on Thursday that Potash Corp.
informally approached its board, a move the Saskatoon-based company
confirmed later. Potash Corp. offered just over EUR40 ($44.80) a
share in cash, according to a person familiar with the matter.
That person said the German company is likely to reject what
would be the largest mining deal since 2012 because it undervalues
the dominant position the two could achieve in North America, where
Potash has major mines and K+S is developing a mine that could
produce some 2.9 million metric tons of potash a year by 2023.
People close to K+S said a combination with Potash Corp. could
yield $370 million in annual synergies by shifting production from
K+S's costlier German mines to Potash's underused Canadian sites,
and by increasing the pricing power of the combined company on the
global market.
The people close to K+S said synergies would add around EUR18 to
K+S shares, which were trading at EUR27 before the news of a
potential transaction broke Thursday, meaning K+S is looking for at
least EUR45 a share.
People close to both companies are privately playing down the
possibility that antitrust concerns could derail a deal.
But Many analysts say the combined market share in North America
and in other markets including Germany mean that German regulators
would likely reject the combination. The German Cartel Office
rejected a 1997 attempt by Potash Corp. to take over K+S, after the
company had been spun off by BASF SE.
Such a combination would have taken away a potential source of
competition to K+S's dominant position in Germany, the Cartel
Office said in a report at the time.
"At the same time, the global oligopoly would have tightened
further and K+S would have been incorporated into [Potash Corp.'s]
pricing policy for the world market," the report said.
The Canadian offer for K+S comes as the potash market remains in
flux following the July 2013 collapse of an informal cartel system
that had helped shape the global price of this $22 billion market.
The end of that system sent the price of potash about 25% lower and
led potash miners' profits to decline sharply.
The miners, including Potash Corp., that formed the two trading
groups often described as cartels say they didn't act to set prices
and weren't cartels. They said the groups just marketed, sold and
transported the potash.
Analysts suggested Friday that Potash Corp. could seek to close
down K+S's North American production, taking supply out of the
market and boosting the price of the fertilizer, which strengthens
plants and makes them more resistant to disease.
"If Potash Corp is successful in closing some supply...then all
potash-levered equities should rejoice," Scotiabank said in a
note.
If Potash Corp. doesn't shut the mine, then it would at least
have more control over the supply and reap the benefits of its sale
by controlling a mine that is set to open in its home base of
Saskatchewan.
Analysts also said that Potash Corp could look to close down
some of K+S's high-cost German mines. K&S is considered to have
among the highest costs among the major producers, and had a cash
cost of around $230 for every metric ton of potash it produced in
2013, according to Scotiabank. Potash Corp. is expected to mine
every metric ton at $95 this year.
Mine closures, though, will likely stoke political opposition in
Germany.
Volker Bouffier, premier of Hesse, the region where K+S is
based, said on Friday that "jobs musn't be at risk," adding he
offered K+S's chief executive support in protecting jobs.
Outside of oil, potash is among the most politically charged of
commodities, given that some governments see it as a strategic
asset. In 2012, Potash Corp.'s attempt to buy Israeli Chemicals
Ltd. was thwarted by the Israeli government. Two years earlier, the
Canadian government stopped BHP Billiton from buying Potash Corp
itself.
Potash Corp. is expected to mine around 9.2 million metric tons
of potash this year, according to Scotiabank, with K+S producing
around 3.2 million metric tons. A merger would give the combined
company almost 27% of global potash capacity by 2017, when both
companies are set to complete new mines. Adding K+S to the
production from the Canpotex trading group that includes Potash
Corp. and two other miners would give the combined entity almost
44% of the world's potash capacity by 2017.
Analysts believe that Potash Corp. would also try to spin off
the salt business of K+S should it succeed in a deal.
Ulrike Dauer in Frankfurt contributed to this article.
Write to Alistair MacDonald at alistair.macdonald@wsj.com and
Eyk Henning at eyk.henning@wsj.com
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