September 25, 2009 / 6:55 PM / 10 years ago

RPT-POTASH-Bankers see logic to M&A but cost may block deals

(Repeats to broaden distribution)

* Now cheaper potash firms may be takeover targets

* Deals would still be costly, may face hurdles

By Michael Erman

NEW YORK, Sept 25 (Reuters) - It seems like an investment banker’s dream: A handful of companies dominate the market for a mineral needed to feed the world, and share prices are down 60 percent since last year, perhaps making them ripe for the picking.

The mineral is potash, a crop nutrient that was until recently little known outside the farm sector. An essential input for rice, corn and other foods, it’s now a hot commodity, spurring speculation about multibillion-dollar deals.

Most of the talk centers on whether global mining giants BHP Billiton (BHP.AX) BLT.L or Vale VALE5.SA(VALE.N) could bid for big potash players, but there’s also a chance that big importers China or India could try to squeeze out the middleman by buying a supplier.

Vale and BHP already have modest potash holdings that could be parlayed into a commanding position. Vale denies it’s interested in acquisitions to expand its fertilizer portfolio, although BHP is a touch more coy about whether it would consider a buy. [ID:nSYD454495]

“One thing Vale and BHP understand very well is the benefit of oligopolies,” said one banker who works in the industry, referring to industries dominated by a small group of suppliers. “Iron ore is a big business — look how it works. If they do the same thing in potash, it makes some sense.”

Eight companies currently control more than 80 percent of the world’s supply: Potash Corp of Saskatchewan POT.TO, Mosaic Co (MOS.N) and Agrium Inc AGU.TO in North America; K+S SDFG.DE, Uralkali (URKA.MM), Silvinit SILV.RTS and Belaruskali in Europe; as well as Israel Chemicals (ICL.TA).


The key to any deal is the price of potash and the direction it’s heading.

The price has more than halved from last year’s high of about $1,000 a tonne. But it remains high in historical terms and should rise further over the next decade as demand for food and fertilizer rises. Analysts say that makes deals more likely.

For BHP or Vale, buying a rival may be cheaper than spending billions of dollars to build up their own potash mines, depending on the stock price of the target company.

“It will have everything to do with where the public market valuations go relative to what (Vale or BHP) think they can build their own organic projects for,” said one investment banker, who spoke on the condition of anonymity.

Potash company stocks have fallen some 60 percent from their 2008 highs. But they have doubled in the last three years as potash prices outperformed those for other commodities, and a deal would cost billions of dollars.

The market capitalization of Potash Corp, Mosaic and Agrium, the three largest North American producers , is $26.4 billion, $21.8 billion, and $7.5 billion, respectively.

For BHP or Vale, the question ultimately comes down to whether they could find better value by investing in metals or even oil than by buying a potash producer.

“People always talk about those things, but in my view they’ll never happen,” said another investment banker who works in the industry.

“The people that own those (potash) assets really believe in the recovery ... Why would any board sign off on selling the company for anything other than the peak of their valuation?” (Editing by Frank McGurty and Janet Guttsman)

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