Chris McKay, Potash Corp. load-out supervisor at the Cory Mine, examines potash inside one of the storage facilities near Saskatoon, October 10, 2013.DAVID STOBBE/Reuters
Potash Corp. of Saskatchewan Inc.'s €7.85-billion ($11.7-billion) proposal to acquire its largest European competitor is more attractive after price declines in the Canadian company's namesake crop nutrient, according to two analysts.
Potash Corp.'s cash offer made in June was rejected by K+S AG of Germany as too low. Since then, spot prices for potash in the United States have dropped 12 per cent and there have been forecasts calling for further declines on the export market. On Monday, Mosaic Co., the largest U.S. producer, said it was cutting output and blamed weaker demand.
Share prices of potash miners have fallen accordingly and K+S traded as low as €28.62 in Frankfurt on Tuesday. That makes Potash Corp.'s €41-a-share bid attractive, said Nils- Peter Gehrmann, an analyst with Hauck & Aufhauser, and Jeffrey Stafford at Morningstar Equity Research.
"While we're certain management believes €41 per share undervalues K+S, we think the offer considerably overvalues the company," Chicago-based Mr. Stafford said in a note Tuesday. He said his fair value estimate for K+S is €24 a share.
Spokesmen for K+S weren't immediately available for comment. A spokesman for Potash Corp. declined to comment on the impact of the potash price.
While Potash Corp. isn't in direct communication with K+S, "our offer has been fair and attractive and given the economic environment, I think it's even more attractive," chief executive Jochen Tilk said at a conference in Toronto on Tuesday.
There's a likelihood the Canadian producer will go hostile, Hauck & Aufhauser's Mr. Gehrmann said in a note to clients. "In any case, recent market turmoil should increase the takeover chances," he said.
Buying K+S would not only give Potash Corp. mine capacity in Germany but also control of the Legacy project, a new mine being built in Saskatchewan. The bidding is being watched closely by the industry because a takeover would mean the largest North American potash supplier would end up with an even greater slice of a market that's cursed with excess capacity.
The battle for market share will intensify because the current environment no longer justifies the previous strategy for producers to support prices by voluntary production cuts, according to Christian Lelong, an analyst at Goldman Sachs. If producers were to opt for all-out competition and operate every asset at full-capacity, potash on the export market could fall to less than $230 (U.S.) a ton, he said. By comparison, Potash Corp.'s average realized price was $273 a ton in the second quarter.
Some remain skeptical of the proposed takeover. Given the decline in Potash Corp.'s own shares since it made its offer in June, a stock buyback might be a better use of funds, said Ben Isaacson, a Toronto-based analyst at the Bank of Nova Scotia.
"A case can be made that POT is actually buying the wrong potash company," he said in a note Wednesday, referring to the Canadian company by its stock ticker.