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Global demand for food fuels mega merger fertilizer bid

Mega mergers | Global demand for food fuels mega merger fertilizer bid Anthony Harrington

Agriculture has been the poor cousin to industry for more than a century, but rising population pressures in the developing world are focusing the attention of investors and industry alike on the central role food production is likely to play in the decades ahead. Nothing signals this more vividly than mining giant BHP Billiton’s hostile $39 million bid for the Canadian fertilizer manufacturer, PotashCorp. This is on top of an earlier acquisition in 2010 by BHP of the potash reserves of another Canadian producer, Athabasca.

Nor is BHP the only massive mining company interested in buying up potash resources. According to the Investor’s Chronicle Rio Tinto and other mining conglomerates have been sniffing around the huge Russian potash miner Uralkali. Having a mineral that large scale food producers need to improve yields has become as valuable as having access to iron ore or copper.

The PotashCorp Board had no hesitation in recommending to its shareholders that they sit tight. PotashCorp Chairman Dallas Howe commented:

“The [Board] unanimously believes that the BHP Billiton proposal substantially undervalues PotashCorp and fails to reflect both the value of our premier position in a strategically vital industry and our unparalleled future prospects… We believe it is critical for our shareholders to be aware of this aggressive attempt to acquire their company for significantly less than its intrinsic value.”

PotashCorp produces about 20% of the world’s primary capacity of the three major fertilizers, potash, phosphate and nitrogen and leads the world in potash production. At its height during the commodity boom of early 2008, the potash price was in excess of $1,000 a tonne. That went down to somewhere around $350 a tonne when the steam went out of commodities, but the world needs quality fertilizers to feed the global population of 6 billion and growing. More than the immediate price gains, the purchase of PotashCorp would give BHP Billiton the same stakes in China’s agriculture market as it currently has in the country’s industrial heartland as a major shipper of iron ore to China’s steel mills.

According to the Financial Times BHP Billiton has secured credit facilities of $49 billion, presumably to back its bid, so what the world has seen so far is probably just the start of an elaborate courtship by BHP of PotashCorp’s shareholders. However, the FT points out that China’s largest fertilizer distributor, Sinochem, which held a government monopoly on fertilizer imports until 1998, while not committing itself, is thought to be a possible alternative bidder, and one that might be more acceptable to the PotashCorp’s board. Sinochem tried to buy the Australian fertilizer company, Nufarm, a much smaller entity, in 2009, for $3.2 billion, but the bid failed.

In May 2008 the World Bank set up the Global Food Crisis as a response to the massive increase in food commodity prices through the back end of 2007 and early 2008. By August 2010 the price of wheat was going off the charts following poor harvests in America. In June this year, the Bank warned that food price spikes and considerable volatility in the price of food staples were giving cause for serious concern. Average food price volatility for a sample of 26 low income countries has been higher over the past year than it was in 2006/2007, the Bank said. Climate shocks, macro-policy factors and regional conflicts lie behind price volatility, but it seems clear that in the medium term at least, food prices will continue to attract investors even as they exacerbate the quality of life for millions of the world’s poor.

Further reading on mega mergers, developing economies and crises:

Tags: BHP Billiton , China , food crisis , food price volatility , Mergers and Acquisitions , mining conglomerates , Rio Tinto
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