Potash – Corporate takeover bid

Many years ago, the first time I heard the word Potash, I thought somebody was referring to a narcotic. I quickly educated myself (Wikipedia is a good primer) and nodded, and didn’t think about it otherwise. Potassium compounds aren’t exactly rare, nor are they terribly exciting – you can use potassium chloride instead of sodium chloride to replace your table salt, and more importantly, its usage as a fertilizer.

Canada apparently has the majority of potash reserves, and the major corporation is Potash Corp (TSE: POT). Never in my wildest imagination did I think back then that it would result in a triple over the past 5 years, but apparently agricultural fertilizer is in such demand that companies with potash reserves have been bidded through the roof.

Yesterday, Potash Corp received a hostile takeover bid for US$130/share, while the day before the takeover trading closed at US$112. After the takeover was announced, trading closed at US$143/share, which likely means that the takeover bid will fail at the present price.

Potash has about 297M shares outstanding (304M diluted), which implies that the price paid is around CAD$40 billion for the equity, plus CAD$4 billion in debt for a total price of around CAD$44 billion. The balance sheet has about $6.5 billion in equity, so there is a takeover premium of about $38 billion over book value. Presumably this is because of the embedded value of their resource reserves, but I skimmed their annual report and couldn’t find any clean quantitative data – it has to exist somewhere, but I couldn’t find it when wading through the many pages for a minute.

Apparently 2008 was a banner year for the company, where high prices allowed the company to mint about 11 dollars per share in earnings. 2009 was a more moderate year, with $3.25/share of earnings. The first two quarters of 2010 have an EPS of $3.02/share, so strictly from a backward looking P/E ratio, it looks expensive. Even if you assume every year is like 2008 from here on in, the CAD$44 billion valuation (roughly CAD$145/share) appears to be “average”.

Because of my investment laziness, combined with a lack of knowledge of the dynamics of the potash industry, I wouldn’t make a firm statement on the valuation of the merger. I don’t plan on touching this stock without doing a lot more research (which I am not going to do). Just strictly looking at the financial statements, it looks like the party willing to pay $44 billion for the company is over-paying, while the board of directors that are recommending the rejection of the takeover are likely playing for more money from their potential suitor.

Still, the general lesson here is that when you learn about some obscure compound or mineral, it might pay to look a little more carefully at it and see if it is plausible whether it will be an in-demand commodity in the future. Everybody knows about petroleum and potash, but what is next? Uranium already had its hype period in 2007, while “rare earths” and lithium are making the headlines currently – what’s next? Antimatter?