Potash Corp.: It's all about a takeover

awillis@globeandmail.com

While there's no hard evidence that venerable Potash Corp. of Saskatchewan is a takeover target, persistent rumours of a bid from BHP Billiton have analysts pricing the possibility of a deal into their coverage of the company.

Speculation that Australia's BHP Billiton will take a run at Potash have made the rounds for months, in part due to the relatively weak performance from one of the world's largest fertilizer plays. BHP Billiton makes no secret of its plans to expand in this sector.

Two weeks ago, Merrill Lynch analyst Jason Fairclough stirred the pot by suggesting that purchasing Potash Corp. at current valuations would boost BHP's bottom line by 13 per cent in each of the first two years after the takeover.

This takeover chatter leaves analysts in something of a quandary, as many see the stock going sideways due to poor prospects for the sector, but taking flight if a bid does actually materialize.

For example, when CIBC World Markets analyst Jacob Bout downgraded the Saskatoon-based company yesterday, based on his bearish outlook for fertilizer prices, he flagged the fact that a takeover bid would change everything.

"While we still like the fundamentals of the agricultural industry and the outlook for the potash market over the next 3-5 years, we continue to have concerns about potash pricing and demand over the next 12-18 months," Mr. Bout said in a report, and he shifted Potash to a "sector perform" with a $110-a-share target price from a "sector outperform" rating. (It closed yesterday at $104.86.)

Then Mr. Bout added: "The biggest risks that the $110 price target is too low are: a) potential bid - note that Potash is trading in line with our net asset value; or b) substantially higher grain prices driving a quick and decisive snap-back in potash demand."

Potash has a $31-billion market capitalization, so any takeover of the company would rank among the largest acquisitions ever seen in Canada.

With Potash shares trading at half the price seen during the 2008 fertilizer boom - shares peaked at $230 each - the board of directors at the Canadian company would likely refuse any takeover overtures, forcing a potential buyer to make a hostile bid.

And a hostile bid of this size, for a domestic company that's a global leader in its field, would carry a high degree of political risk: Any foreign buyer faces a possibility that Ottawa blocks the deal.

Oil sands romance deepens

South Korea's $1.8-billion foray into the oil patch reinforces a long-established trend: Canada's oil sands will be developed by foreign energy companies.

State-owned Korea National Oil Corp.'s friendly bid for Harvest Energy Trust last week is just the latest in a series of takeovers aimed at building substantial holdings in conventional Canadian energy fields and especially in the reserve-rich, capital-intensive oil sands. There's another trend here: The deals are getting larger, as smaller plays are picked off and buyers get comfortable with owning increasingly large properties.

KNOC, as the South Korean oil company is known, is stepping up several notches by acquiring Harvest. It's only other Canadian acquisition came in 2006, when it paid $270-million for an oil sands property owned by Newmont Mining.

In snapping up Harvest, KNOC followed in the footsteps of global players that range from France's Total to Exxon Mobil and Royal Dutch Shell. (The interesting story here is who does not have a stake in the oil sands: British Petroleum is conspicuous in its absence, a legacy of previous management's views on this play, and China's state-owned energy entities are also only minor players.) The Harvest acquisition offers a simple case study on the dynamics of this sector.

Along with conventional oil and gas properties in Western Canada, the trust has oil sands holdings in two areas, Alberta's Peace River and Cold Lake regions. It would be logical to expect deep-pocketed KNOC to bulk up in both parts of the province, with further acquisitions or partnerships.

All it takes is a glance at Alberta government-supplied maps of these two areas to figure out who else intends to play the energy acquisition game, and who might get picked off.

Royal Dutch Shell, a serial acquirer, dominates the Peace River oil sands. Smaller players in this patch of the province include Baytex Energy Trust and Penn West Energy Trust.

Now, this is not a prediction that those two relatively large trusts are going to be taken out in the near future. But the trend is not their friend: Like Harvest Energy, Baytex and Penn West have no controlling shareholder, and both face the prospect of losing lustre as they convert to traditional common stock companies.

Move to Cold Lake, and once again, the global energy giants have staked claims, and there are smaller domestic companies in the mix. Imperial Oil, the domestic arm of Exxon Mobil, has a massive stake, along with Royal Dutch Shell.

At the other end of the spectrum is Bonavista Energy Trust, with five separate properties in the Cold Lake region, and one of the largest independent domestic energy companies, Canadian Natural Resources, with 26 properties in the area.