The merger deals won't likely end with a BHP Billiton acquisition of Potash Corp. of Saskatchewan, should the Australian mining giant succeed in taking over the fertlizer producer.
Given the likely pricing for Potash Corp., BHP would go from a largely unlevered mining company to a pretty heavily levered one in short order, prompting likely asset sales.
According to various analyst estimates, BHP could pay $185 to $200 a share for Potash and still expect the deal to add to earnings in 2011. However, the balance sheet would start to get stretched at those levels. If the company had to get to the top end of the range, it would end up with about $2-billion a year in interest costs.
Were a purchase financed 100 per cent by debt, buying Potash would take leverage to 53 per cent, compared with 15 per cent at year end, UBS said. Already, the U.K. market is talking about a potential rights issue to solidify the equity/debt balance if need be, UBS said.
The quickest fix would be asset sales, and analysts point to Potash's nitrogen business as likely to be sold to raise cash.
Merrill Lynch, in a report last year predicting a BHP bid, said the nitrogen business could fetch $4-billion to $6-billion.
UBS also pointed to the nitrogen business as a sale candidate, and said the phosphate division could also go on the block. The units are worth $3.2-billion apiece by BHP's math.
In other words, with a little luck on sale prices, BHP could pay for better than 10 per cent of the takeout price with cash generated by Potash's assets.
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