If you’re a Canadian investor or you follow the commodities market, you’ve heard of BHP Billiton’s hostile takeover proposal for Saskatchewan’s Potash Corporation of Canada (TSX: POT) last week.
BHP Billiton proposed a buyout of Potash at a price of just $130/share. A price significantly lower than the June 2008 highs above $200/share that we saw in the heat of the China commodities boom season pre-financial crisis. Once the hostile takeover plans were announced, POT shares popped considerably, from about $115/share to, over the ensuing week, as high as about $160/share. Currently TSE:POT sits at $154 as of Wednesday’s close. Clearly, the markets thought that the $130/share offer was a real low-ball, offensive, and vastly underrating the real value of the company (remember, Potash is the world’s largest potash manufacturer and they sit on the richest potash reserves in the world).
Since then, rumours have flown about other players coming in to offer counter-bids – such as Rio Tinto, Vale, or some Chinese company – but so far no other corporation has stepped up to the table.
How Does a Hostile Takeover Work?
Will BHP ultimately takeover Potash? To answer this, you need to know how a hostile takeover works. Takeovers are “hostile” for at least two reasons:
Hostile takeovers are unsolicited bids for the purchase of a publicly traded company. A given company is not for sale, but the hostile takeover bid pursues it anyway. Second, a hostile takeover bid will go directly to the shareholders (not the Board of Directors) of a company to propose its cash or financed buyout. Takeovers can also be hostile if the purchaser approached the Board initially, and the Board rejects the offer, but the purchaser then continues to approach the shareholders anyway. In BHP’s case, BHP just went directly to the shareholders.
Since the majority shareholder effectively controls the company (since shares represent votes on the direction of the company), a majority shareholder can effectively force the company to agree to a sale.
In the case of BHP, BHP is basically pushing an all-cash tender offer for shares of Potash at $130, which was a slight premium to the then-trading price of $115 or so. The higher price offer is done as an incentive to get shareholders to sell their shares at the higher price. But what happened was that the bid incentivized enough other players over to the table, pushing the share price up well past BHP’s scant premium.
Potash CEO Doyle immediately scoffed at the $39 billion all-cash offer, noting how much of a low-ball figure it is given the company’s real value in the future commodities market worldwide. I’d have to agree with that. BHP would have to raise its bid just to meet natural shareholder demand. (When Analysts Thought Potash had Double the Upside)
What BHP did was made a public tender offer. Another option for a hostile takeover is to do a creeping tender offer, in which the purchaser (BHP) would gradually buy more and more shares of the target company (POT), in order to gain a controlling interest. For obvious reasons, this sort of takeover attempt is easier for the target company to spot and prevent.
Defenses & Protection From Hostile Takeovers
Any tender offer, though, is always subject to the restrictions and guidelines of the 1966 Williams Act, in accordance with which the buyer has to file papers with the SEC (Securities and Exchange Commission). All public tender offers are also subject to certain time restrictions.
In some cases, a company will also have a built-in supermajority clause which states that at least, say, 80-90% of its shareholders must agree to the buyout, which can make it more difficult to takeover.
Some companies (like Telus (TSE: T and TSE: T.A)) also issue dual-class stock – one set of shares that has voting rights, and another set that doesn’t. Investors might be able to purchase one set, the set without voting rights, and if they do, they obviously can’t gain control of the company through any creeping takeover.
Then there are poison pills. Once a hostile takeover has begun, the target company can do things to make itself less desirable as a takeover target: key managers and CEOs can threaten to leave if taken over; there may be a shareholder’s provision which allows shareholders to be able to buy more stock at a discount once a certain amount (say, 45%) of shares are acquired by any single shareholder; and finally, if the company contains a specific division or department that has made it attractive, the target company might elect to spin it off in order to keep it out of the bid.
You can see Potash’s poison pills in action now. According to BNN, “Potash Corp adopted a 90-day shareholder rights plan last week in response to BHP’s hostile bid. The plan will trigger a massive dilution in shares if a single investor acquires a stake of more than 20 percent by giving existing shareholders the right to buy more Potash shares at a sharp discount.”
How BHP Could Takeover Potash
Quite simply, BHP will try to persuade current POT shareholders to vote in new management, who would then approve the takeover. BHP will persuade shareholders with a higher share price than the current one. The problem now (for BHP) is, that the market has boosted POT’s share price above the takeover bid target, making the bid price not at all attractive.
But what other lines of defense might POT put up against BHP, and how hard is BHP willing to fight for the takeover?
According to an interview today on BNN, BHP CEO Marius Kloppers indicated that he would be prepared to walk away from the takeover offer rather than paying more for each share.
Compare this with the market reaction and Canadian analysts’ consensus that a fair-value bid would be anywhere between $160-$180/share, and it seems there is some irreconcilable disconnect between BHP and POT.
Perhaps the takeover attempt is a bit of drama aiming to achieve something else in the markets? There has already been speculation that the only reason BHP bought up a small site in Saskatchewan for future potash development was in order to position itself for this current takeover. If that’s true, could the current takeover attempt be another example of just such posturing? And why, for what end?
One possibility is that BHP might still raise its all-cash offer, by tapping into a line of credit worth about $45 billion. But if the words of Kloppers can be trusted, this seems unlikely. BHP has also said it expects commodity markets to be mixed going forward – but if so, then why the urge to buy Potash all of a sudden?
Either way, BHP’s takeover deadline is October 19th. Stay tuned.
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