Commodity price drop helps PotashCorp’s bid: analysts

PotashCorp of Saskatchewan’s 7.85 billion euro ($ 8.76 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.

PotashCorp’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 U. S. have dropped 12 per cent and there have been forecasts 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 euros in Frankfurt on Tuesday. That makes PotashCorp’s 41- euros- 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 EUR 41 per share undervalues K+ S, we think the offer considerably overvalues the company,” Chicago- based Stafford said in a note Tuesday. He said his fair value estimate for K+ S is 24 euros a share.

Spokespeople for K+ S weren’t immediately available for comment. A spokesman for PotashCorp declined to comment on the impact of the potash price.

While PotashCorp 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 officer Jochen Tilk said at a conference in Toronto Tuesday.

There’s a likelihood the Canadian producer will go hostile, Hauck & Aufhauser’s 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 PotashCorp 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 Group Inc.

Some remain skeptical of the proposed takeover. Given the decline in PotashCorp’s own shares since it made its offer back 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.