Potash Corp./Saskatchewan (POT), the Canadian integrated fertilizer and feed products company with operations in Saskatchewan and New Brunswick, was just offered a roughly $38 billion cash buyout by mega-miner BHP Billiton… nothing to sneeze at.
“Yesterday, the giant Aussie mining company BHP Billiton offered $130 per share in cash for Potash Corp. The deal would be worth a whopping $38 billion. POT is up 26% on the news at around $143, well above the offer price.
“So what do we do now?
“First, let’s talk about valuation. Remember, my baseline net asset value was $100–110 per share. That was very conservative. I based my number on a rough estimate of what it would cost you to build POT from scratch. (This is the ‘replacement value’ we often talk about around here.) I’ve shared with you other similar estimates that were much higher. If I remember correctly, I believe Morgan Stanley’s estimate was $158, for instance.
“Keep in mind, replacement value is a bare minimum. Most growing and profitable companies command premiums well above replacement value. This is why I love buying stocks below replacement value. It’s often an excellent indicator of value.
“BHP certainly sees the value in owning POT. And we’ve got plenty of room, which is why POT trades well above BHP’s offer. The market is betting that BHP will sweeten the pot. I think they will too.
“This brings us to what is so special about POT. I’ve often talked about the value of potash as a nutrient in boosting crop yields. It’s part of the solution to the problem of growing more food for a growing planet. Most of the world uses far less potash than science recommends. So, there is plenty of room for demand to grow.
“Now, what about supply? Quality potash mines are hard to find. Potash Corp and Mosaic (MOS) own most of the best assets. (The latter is up nearly 10% in sympathy. MOS may be the next wooed in the scramble for potash. The Brazilians, who don’t have much potash but need it, are sniffing around. Vale, S.A., is the likely buyer.)
“We got more evidence of the strategic importance of potash last week. The two big Russian potash producers are getting together. As the FT reported, this would be ‘the first making of a national champion since the state-backed consolidation of the energy sector in the mid-2000s.’ The combined company would be the second largest producer of potash behind Potash Corp.
“So, we own a valuable asset here that is hard to reproduce and is of strategic importance to the world’s food supply. And prices and volumes have only started to recover from crisis lows.”
Mayer is still expecting a higher bid from BHP, and guesses that PotashCorp could be in its last days as a public company. If you want more analysis — and specific advice — as this drama unfolds, you should subscribe to his regular newsletter Capital & Crisis, which is available from Agora Financial, on this research page.