Potash Corp. of Saskatchewan Inc. is confident K+S AG shareholders would accept its $8.7-billion (U.S.) bid, but is open to raising the offer if its German rival could reveal more value not currently seen by the Canadian company, according to a source close to the deal.
K+S has rejected Potash Corp.'s offer of €41 ($45 U.S.) a share, saying it is too low and grossly undervalues its Legacy potash project in Saskatchewan.
K+S has said it believes Legacy alone is worth €21 a share, which has led some analysts to speculate that K+S is looking for an offer of about €50 a share.
The source characterized that amount as inconceivable and said there was no chance that such an offer would materialize given the average takeover premium in Germany is 32 per cent and Potash Corp. is offering a 57-per-cent premium to K+S's share price over the past year.
The source said Potash Corp. believes the current offer is a full price and that it has broad shareholder support. However, the source said that if K+S gave Potash Corp. access to its books and the Canadian company found more value, it could raise the bid.
"If we sit down and do due diligence and they can demonstrate some incremental value to us, we might have an extra euro for them. I wouldn't rule that out," said the source, who is close to Potash Corp.
Potash Corp.'s current bid represents a 40-per-cent premium to the K+S stock price the day before the offer became public in June. K+S is now trading at €36.87 a share, 10 per cent lower than Potash Corp.'s offer price.
The only way K+S shareholders can show Potash Corp. they like what it's offering is if Potash Corp. takes its bid directly to investors, or shareholders persuade K+S directors and management to accept the offer.
Top executives of K+S have not indicated a specific price the company would accept for a deal, a spokesman for the Germany company reiterated in an e-mail.
The tensions between the companies started in May after Potash Corp. sent K+S its takeover proposal. Until that time, the companies' top executives were on friendly terms. The chief executives of Potash Corp. and K+S spoke in February about the potential merger, the source said.
But since the proposal was sent, the source said K+S has refused to meet and described the company as "going into a tortoise shell."
The takeover would give Potash Corp., the world's biggest fertilizer producer, control of more than a third of the global potash market. Potash Corp. would get another large mine in Saskatchewan where the bulk of its operations are located, as well as K+S's European operations and salt production.
After K+S received the proposal, the German company asked several questions, including about job preservation, which it said was only met with vague answers from Potash Corp. Although Potash Corp. has said a deal isn't predicated on job reductions or production cutbacks, K+S wants more assurances.
The source said the inquiries came in the form of a five- to six-page questionnaire. "They sent questionnaires instead of meeting with us," the source said.
Some analysts have said the bid is rich, with one likening it to a "winning lottery ticket" for K+S shareholders. Others have said it is an expensive way for Potash Corp. to get access to more supply given that its own mines are underutilized.
K+S said Potash Corp. could take its bid directly to shareholders in a hostile bid, though that appears unlikely when the deal became public less than two weeks ago.
K+S believes Potash Corp. wants to cut jobs and shutter some of K+S's higher-cost operations so that it can run its underutilized mines in Saskatchewan at full tilt. That could give Potash Corp. more power over fertilizer prices again.
The Saskatoon-based miner and two other North American producers along with the Russian-Belarussian potash cartel used to control 70 per cent of the potash market. That is no longer the case today with new potash producers on the scene and the end of the Russian-Belarus cartel.
A spokesman for Potash Corp. had no comment.
Rachelle Younglai