Canadian mining giant Potash Corporation of Saskatchewan offered to take over German rival K+S AG in a deal that, if successful, would create a company capable of dominating a big chunk of the global market for potash.
Potash Corp. offered K+S roughly €7.8 billion ($8.74 billion), or just over €40 a share in cash, according to a person familiar with the matter, an amount that would rank the proposed acquisition as one of the largest mining deals in recent years.
In a statement, K+S said Potash Corp. had informed its board that the Canadian company “may decide, depending on certain conditions, including a due diligence exercise,” to buy the company.
K+S is likely to reject the offer as too low, according to the person familiar with the matter. K+S is developing a mine in the western Canadian province of Saskatchewan and believes Potash Corp.’s offer doesn’t take into account potential synergies and the dominance this would give it in North America, the person familiar with the matter said.
Potash Corp. confirmed that it had made a private proposal to K+S. “There is no certainty that any offer will ultimately be made or as to the terms on which such an offer might be made,” it said in a statement.
The Canadian offer for K+S comes as the potash market remains in flux following the July 2013 collapse of an informal cartel system that had helped shape the global price of this $22 billion market. The end of that system sent the price of potash about 25% lower and led potash miners’ profits to decline sharply.
As new mines come into production during the next five years, supply is expected to surge. Unless demand, especially in China and India, increases as sharply as was expected when companies invested in expansion, prices could suffer further.
Potash is a compound of potassium, which along with nitrogen and phosphorous, is essential for plant life. It is sold to farmers as a powdery soil additive that strengthens plants and makes them more resistant to disease.
Potash Corp. is expected to mine around 9.2 million metric tons of potash this year, according to Scotiabank, with K+S producing around 3.2 million metric tons. A merger would give the combined company almost 27% of global potash capacity by 2017, when both companies are set to complete new mines.
The 3.25 billion Canadian dollar ($2.64 billion) project that K+S is building in Saskatchewan could produce some 2.9 million metric tons of potash a year by 2023, according to the company.
Until 2013, just two trading groups controlled as much as 70% of global potash capacity. Minsk-based Belaruskali joined with with Russian miner Uralkali JSC in the Belarusian Potash Co. until the Russians exited the partnership. Canpotex Ltd. still markets the sale of potash beyond North America of the continent’s three big producers, Potash Corp., Plymouth-based Mosaic and Calgary-based Agrium Inc.
The miners who form the two organizations have said Canpotex and Belarusian Potash Co. weren’t cartels and didn’t set prices. They said the groups served a logistics and sales function by marketing, selling and transporting the potash.
Adding K+S to the production from Canpotex’s members would give the combined entity almost 44% of the world’s potash capacity by 2017, according to Scotiabank’s numbers.
Even before the collapse of the potash organizations, the price of potash had been falling. It is currently trading 30% below its October 2011 peak, when talk of global population growth and improving diets in developing countries propelled potash into the ranks of other booming commodities.
That demand has yet to materialize, as demand in several key emerging economies disappoints and after the financial crisis prompted farmers to switch to cheaper fertilizers.
Last year, Potash Corp. earned 27% less from potash than 2012, the last full year under the cartel system and almost 50% less than 2011.
K&S is considered to have among the highest costs among the major producers, and had a cash cost of around $230 for every metric ton of potash it produced in 2013, according to Scotiabank. Potash Corp. is expected to mine every metric ton at $95 this year.
The sector has seen few takeovers in recent years, given its domination by a few key players and the fact that governments often own stakes in these companies and are reluctant to see them being sold to foreign interests, among other factors.
The last major takeover attempted ended in November 2010, when the Canadian government stymied BHP Billiton’s $38.6 billion offer for Potash Corp.
According to data from Dealogic, if Potash Corp.’s proposed deal were to go through at €7.8 billion it would be the largest mining merger since Glencore International PLC’s takeover of Xstrata PLC for almost $30 billion in February 2012.
By Alistair MacDonald