August 18, 2010 / 3:16 PM / 9 years ago

K+S, Yara unlikely to see takeover bonanza

FRANKFURT (Reuters) - Analysts largely dismissed speculation that Western Europe’s top fertilizer companies K+S SDFG.DE and Yara (YAR.OL) could end up on the radars of mining giant BHP Billiton (BHP.AX), which has launched a hostile bid for Potash Corp POT.TO.

Anglo-Australian BHP, in a bid to become the world’s top fertilizer maker, took its $39 billion offer for Potash Corp directly to shareholders after drawing a fierce rebuff from management.

The proposed deal, which would rank as the world’s largest by far this year, buoyed global agricultural stocks including K+S and Yara, which have risen more than 6 percent since the approach became public.

While most analysts expect no follow-on deals involving K+S and Yara, there is disagreement over the strength of the sector rally that could be triggered by the mooted deal.


Analysts cite a number of drawbacks that make K+S, the world’s fourth-largest potash miner, a much less attractive takeover target than Canadian rival Potash Corp.

The German miner’s domestic potash deposits give it little growth potential, neither does its strong focus on mature European markets. In addition, its production costs are high compared to industry peers, say analysts at Deutsche Bank and Citi Group in separate notes.

“K+S, we believe, is relatively unattractive to a bidder, given its high cost position, low exposure to growth markets of China and India, lack of expansion potential and short reserve life,” analysts at Citi said.

Deutsche Bank, which recommends investors sell K+S shares, also said that the stock’s market valuation including debt of 11 times estimated 2010 core earnings makes it expensive.

BHF Bank, which also has as sell recommendation on K+S shares, echoed that assessment: “Aside from short-term sentiment, in the longer term we see the sector and K+S fundamentally unaffected (by BHP’s bid).”

Yara, the world’s largest supplier of nitrogen fertilizers, was also unlikely to come into BHP’s crosshairs, brokerages including Citi said.

Even though potash and nitrogen, alongside phosphorus, are the most important fertilizer chemicals, there is little overlap in the production process. Nitrogen is derived from natural gas with no link to mining.

Norway’s Yara would be a better fit for Canadian nitrogen specialist Agrium AGU.TO, which earlier this year bowed out of a hostile bid for U.S. rival CF Industries (CF.N), said another analyst, speaking on condition of anonymity.


Other market participants say K+S and Yara shares stand to gain from a increased demand for fertilizer assets in the wake of the ongoing takeover tussle, even though there is no direct read-across.

“(There’s a) low probability BHP would bid for K+S... Nevertheless we stick to our positive view with regard to the potash business and confirm our buy recommendation,” said Heinz Mueller at DZ Bank.

“Applying yesterday’s EBITDA-multiple of Potash Corp on K+S we estimate a fair value of Euro 55.0 per share,” he added.

K+S shares were up 1.3 percent at 44.50 euros at 1330 GMT.

Wolfgang Fickus at WestLB took a similar line.

“BHP’s determination to build up market-leading potash exposure means that we expect M&A to be the key share price driver for the entire sector,” he said, changing his recommendation on K+S to neutral from reduce.

“We do not see downside for the K+S share any longer, but rather upside from current trading levels,” he added.

A $39 billion takeover offer in the fertilizing sector bodes well for Yara stock, even if the Norwegian company is of little relevance to BHP, Handelsbanken analyst Anne Gjoen argued.

Potash Corp’s rejection of a bid far above market price is a strong show of confidence, she added.

“One of (Potash Corp’s) arguments is that the fertilizer market is in an early phase of the cyclical upturn, and if that is the case there is reason to believe this will also apply to Yara.”

Additional reporting by Richard Solem and Camilla Knudsen in Oslo

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