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Work at K+S Legacy potash project. (Image courtesy of K+S)
Shareholders at Germany-based potash producer K+S AG say a takeover is more likely than most think because suitor Potash Corp’s (TSX:POT) main objective is to seize its rival’s ambitious Legacy project in southern Saskatchewan and scale it back.
Last week, K+S rejected an initial Cdn$10.9 billion takeover offer by Potash Corp., saying the bid was too low and not in its interest. Since then, rumours of an upcoming sweetened bid have circulated strongly among insiders.
They agree that the Canadian potash giant is in a good position to complete the acquisition, if it so desires. The question is whether it would be the right thing to do.
For some it makes sense, as the deal would push Potash Corp.’s market share above 30%, and could give it greater leverage in negotiations with customers.
For others, it is not worth it as K+S’s assets are inferior and the Canadian miner doesn’t really need them at the moment.
And there is a third group — comprised mainly of K+S shareholders — who believe Potash Corp is seeking to slash K+S’s production, particularly the Legacy mine, and so reduce oversupply.
“One shouldn’t underestimate what this mine could do to the potash market. That’s the real reason for Potash Corp to take an interest in K+S,” an institutional shareholder told Reuters Thursday.
Bernstein Research analyst, Jeremy Redenius, shares his opinion:
“The main rationale for the acquisition appears to be to prevent K+S’s Legacy from disrupting market prices as it adds capacity to the already over-supplied global and North American markets,” he told Reuters.
But Ben Scarlett, an analyst at J.P. Morgan, said earlier in the week that the potential takeover wouldn’t be as easy as suggested, as it is likely to face substantial execution risk.
“The completion [of such deal] will probably necessitate anti-trust or other concessions, limiting synergies,” he said in a note to clients.
Global potash markets haven’t changed all that much since Potash Corp. tried buying 51% of K+S in 1997, Scarlett noted. While that attempt was blocked by German authorities, the industry has now consolidated and the number of individual producers has declined, particularly in Europe, he added.
K+S has already spent two billion euros on its Legacy project, which it says is the first potash mine to be developed from scratch in 40 years. Production from the mine, located approximately 50km north of the city of Moose Jaw, is expected to begin mid-2016.
