Topping the bid on the table for Potash Corp. of Saskatchewan would probably require about $50-billion (U.S.). If a management buyout of the company is on the table, where could that money come from?
BHP is planning to borrow as much as $45-billion for its bid, but that is on a much larger balance sheet of the whole BHP empire. A structure that leaves Potash Corp. as a standalone entity, such as an MBO, wouldn't have nearly as much borrowing capacity.
The consensus estimate for EBITDA at Potash Corp. over the coming two years averages about $3-billion. In the current lending environment, bankers say a lending syndicate could probably be talked into about 3.5 times that in long-term debt, or about $10.5-billion. If the money is coming from Chinese lenders, perhaps even more would be available.
Balanced against that is the fact that Potash Corp. already has almost $4-billion of debt outstanding, so that will reduce the amount of new leverage banks will provide.
Also, banks might go above and beyond that multiple for an acquisition bridge loan, providing there were very specific plans to take it out quickly using other sources of financing.
Asset sales: $12-billion
Vending off Potash Corp.'s non-potash fertilizer businesses could raise about $12-billion, according to analysts' estimates. That's assuming Potash could get a reasonable price when potential buyers know that the company needs to sell quickly to make a deal work as a defensive tactic.
Equity cheques: the balance?
Raising $10-billion to $15-billion in debt and $12-billion with asset sales would still leave a significant portion that would-be buyers would have to put up in cash.Taking the midpoint, those options would provide as much as $25-billion in financing, or about half the total needed to top BHP (and that's assuming BHP doesn't want to pursue a bidding war that drives prices even higher).
If a potential Chinese backer were to provide almost half that, financing as much as possible without gaining control to avoid tough political questions, it still leaves about $12-billion needed from other sources that are palatable to policy makers in Ottawa and Saskatchewan's capital of Regina.
It's that big number that has some bankers very skeptical about the chances of a management buyout being competitive with BHP.