* C$4.50/share bid backed by Potash One board
* Eyes $2.5 billion in investments to develop new mine
* K+S shares down 2 pct, Potash One up 25 percent (Adds Saskatchewan official comments, potash background, updates share activity; in U.S. dollars unless noted)
By Ludwig Burger and Rod Nickel
FRANKFURT/WINNIPEG, Nov 22 (Reuters) - German fertilizer producer K+S AG SDFG.DE is buying Canada’s Potash One KCL.TO for C$434 million ($428 million), joining a rush for scale in an industry that will play a crucial role in feeding the world.
K+S’s C$4.50-a-share offer, a 31 percent premium to the average price over the previous 10 sessions, comes less than three weeks after Canada blocked a $39 billion hostile bid by BHP Billiton (BHP.AX) for Potash Corp (POT.TO), the industry’s dominant player.
Unlike that bid, K+S said its takeover would not be subject to a review under the Investment Canada Act. The law, which stipulates a foreign takeover must carry a “net benefit” for the country, was the basis of Ottawa’s rejection of BHP’s offer.
In K+S’s case, the value of Potash One’s assets -- as opposed to the deal value -- falls well short of Investment Canada’s C$299 million threshold, said a lawyer specializing in foreign investment at a large Canadian law firm. The source, who was not authorized to speak on the matter, asked not to be named.
K+S said on Monday it made its cash offer for Potash One as it looks to build up new reserves to replace domestic deposits it expects will be depleted in about four decades.
“The offer complements our growth strategy to expand our potash capacities and our average mine life,” Chief Executive Norbert Steiner said.
A wave of interest in potash and other soil nutrients has surfaced this year, with corn and wheat prices touching two-year highs. That has given farmers more incentive to spend money on boosting crop yields.
Over the long term, income growth and a move to more protein-rich diets in developing countries like China and India have fueled bullishness around the fertilizer sector.
For a graphic of world potash reserves, click on:
The deal, subject to Potash One shareholder approval, is expected to close in the first quarter of 2011 and ends months of speculation over K+S’s plans.
K+S had talked with Russia’s Andrei Melnichenko and his EuroChem fertilizer group about jointly developing the Verkhnekamsk potash deposits in the Ural Mountains. But Melnichenko walked away from the negotiations last month. [ID:nLDE6971GY]
K+S shares were down 2 percent at 48.25 euros on Monday. Potash One shares jumped 25 percent to C$4.51.
K+S said Potash One held several potash exploration licenses, the most advanced being its Legacy project in the Western Canadian province of Saskatchewan, with a capacity of up to 2.7 million tonnes of potash a year.
That province is also home to the main operations of the world’s largest fertilizer producer, Potash Corp.
“The realization of this production capacity would represent an approximately $2.5 billion capital investment into Saskatchewan and create up to 300 highly skilled jobs,” K+S said, adding it expects the Legacy project to come on stream no earlier than 2015.
Saskatchewan’s provincial government fought to block BHP, but it supports K+S’ entry, said its top elected official, Premier Brad Wall.
“We welcome this kind of investment,” Wall said, noting that both K+S and Brazil’s Vale SA (VALE5.SA) have shown interest since Canada’s refusal of BHP.
“You can say no and still have a welcoming business climate. Nobody burst into flames.”
Starting a new mine would boost Saskatchewan’s revenue from the potash industry and create hundreds of jobs, Wall said.
That said, proposed new mines from K+S, Vale and BHP, along with brownfield expansions by existing players, raise some concerns about future over-production of potash that could weaken prices of the nutrient, Wall said. Saskatchewan collects royalties from its potash producers based on a price-sensitive formula.
Legacy is one of only a handful of advanced potash development projects in the world, said analyst Joel Jackson, who covers Potash One for BMO Capital Markets in Toronto
K+S appears to be serious about building the mine given that it has subscribed to a C$30 million debenture from Potash One to fund construction of infrastructure at the Legacy project, Jackson said in an interview.
“That to me would signal K+S’s intention to advance the project as opposed to merely locking up a reserve,” he said.
The deal also has the benefit of driving down the average cost of K+S’s high-cost potash mines, Jackson said.
It’s unlikely a better bid will emerge, given the C$16.5 million break fee, board approval and premium takeout multiple, Robert Winslow, an analyst who covers Potash One for Wellington West Capital Markets in Toronto, said in a note to clients.
A K+S spokesman said the takeover price would be financed using the group’s cash reserves as well as credit facilities and would not require a capital increase. He declined to comment on the funding of future investment needs in Canada.
The takeover offer comes less than two weeks after Potash One’s Legacy project cleared a key regulatory hurdle.
National Bank Financial Inc is acting as exclusive financial adviser to Potash One.
$1=$1.02 Canadian Additional reporting by Michael Erman in New York and Pav Jordan in Toronto; editing by Frank McGurty