By Alistair MacDonald and Eyk Henning
Canadian mining giant Potash Corporation of Saskatchewan offered
to take over rival K+S AG in a deal that, if successful, would
create a company capable of dominating a big chunk of the global
market for the fertilizer.
Potash Corp. offered K+S roughly EUR7.8 billion ($8.74 billion),
or just over EUR40 a share in cash, according to a person familiar
with the matter, an amount that would rank the proposed acquisition
as one of the largest mining deals in recent years.
In a statement, K+S said Potash Corp. had informed its board
that the Canadian company "may decide, depending on certain
conditions, including a due diligence exercise," to buy the
company.
K+S is likely to reject the offer as too low, according to the
person familiar with the matter. K+S is developing a mine in the
western Canadian province of Saskatchewan and believes Potash
Corp.'s offer doesn't take into account potential synergies and the
dominance this would give it in North America, the person familiar
with the matter said.
Potash Corp. confirmed that it had made a private proposal to
K+S. "There is no certainty that any offer will ultimately be made
or as to the terms on which such an offer might be made," it said
in a statement.
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.
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.
Potash is a compound of potassium, which along with nitrogen and
phosphorous, is essential for plant life. It is sold to farmers as
a powdery soil additive that strengthens plants and makes them more
resistant to disease.
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.
The 3.25 billion Canadian dollar ($2.64 billion) project that
K+S is building in Saskatchewan could produce some 2.9 million
metric tons of potash a year by 2023, according to the company.
Until 2013, just two trading groups controlled as much as 70% of
global potash capacity. Minsk-based Belaruskali joined with with
Russian miner Uralkali JSC in the Belarusian Potash Co. until the
Russians exited the partnership. Canpotex Ltd. still markets the
sale of potash beyond North America of the continent's three big
producers, Potash Corp., Plymouth-based Mosaic and Calgary-based
Agrium Inc.
The miners who form the two organizations have said Canpotex and
Belarusian Potash Co. weren't cartels and didn't set prices. They
said the groups served a logistics and sales function by marketing,
selling and transporting the potash.
Adding K+S to the production from Canpotex's members would give
the combined entity almost 44% of the world's potash capacity by
2017, according to Scotiabank's numbers.
Even before the collapse of the potash organizations, the price
of potash had been falling. It is currently trading 30% below its
October 2011 peak, when talk of global population growth and
improving diets in developing countries propelled potash into the
ranks of other booming commodities.
That demand has yet to materialize, as demand in several key
emerging economies disappoints and after the financial crisis
prompted farmers to switch to cheaper fertilizers.
Last year, Potash Corp. earned 27% less from potash than 2012,
the last full year under the cartel system and almost 50% less than
2011.
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.
The sector has seen few takeovers in recent years, given its
domination by a few key players and the fact that governments often
own stakes in these companies and are reluctant to see them being
sold to foreign interests, among other factors.
The last major takeover attempted ended in November 2010, when
the Canadian government stymied BHP Billiton's $38.6 billion offer
for Potash Corp.
According to data from Dealogic, if Potash Corp.'s proposed deal
were to go through at EUR7.8 billion it would be the largest mining
merger since Glencore International PLC's takeover of Xstrata PLC
for almost $30 billion in February 2012.
Write to Alistair MacDonald at alistair.macdonald@wsj.com and
Eyk Henning at eyk.henning@wsj.com
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