By Alistair MacDonald in Toronto and Eyk Henning in Frankfurt
An attempt by Canada's Potash Corp. to buy rival miner K+S AG
and create a dominant potash player in the Americas faces likely
pushback from the German company and regulatory hurdles.
A tie-up between two of the world's largest potash miners would
create a company capable of controlling up to 30% of the global
market just two years after the collapse of a global cartel system
that had helped regulate prices of this key agricultural
commodity.
But some analysts say a deal will likely be nixed by German
federal regulators, who stopped a similar takeover attempt in
1997.
K+S, Germany's largest miner, said on Thursday that Potash Corp.
made an informal approach to its board, a move the Saskatoon-based
company confirmed later. That approach was at just over EUR40
($44.80) a share in cash, according to a person familiar with the
matter.
That person said that the German company is likely to reject the
advance given it undervalues the dominant position the two could
achieve in North America, where Potash has major mines and K+S is
developing its own mine.
People close to K+S say a combination with Potash Corp. could
yield $370 million in annual synergies by shifting production from
K+S's costlier German mines to Potash's underutilized Canadian
sites, and by increasing the pricing power of the combined company
on the global market.
The people close to K+S said synergies would add around EUR18 to
K+S's shares, which were trading at EUR27 before the news of a
potential transaction broke Thursday, meaning K+S is looking for at
least EUR45 a share.
Shares in K+S climbed by around 30% in Frankfurt, while Potash
Corp's shares were trading 5.38% lower in late morning trade in
Toronto.
Many analysts say that the combined large market share in North
America, and in other markets including Germany, means that German
regulators would likely reject the combination. The German Cartel
Office rejected a 1997 attempt by Potash Corp to take over K+S,
after the company had been spun off by BASF.
Such a combination would have taken away a potential source of
competition to K+S's dominant position in Germany, the Cartel
Office said in a report at the time.
"At the same time, the global oligopoly would have tightened
further and K+S would have been incorporated into [Potash Corp.'s]
pricing policy for the world market," the report said.
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.
The miners, including Potash Corp., that formed the two trading
groups often described as cartels say they didn't act to set prices
and weren't cartels. They said the groups just marketed, sold and
transported the potash.
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.
Analysts suggested Friday that Potash Corp. would seek to close
down K+S's North American production, taking supply out of the
market and boosting the price of the fertilizer, which strengthens
plants and makes them more resistant to disease.
"If Potash Corp is successful in closing some supply... then all
potash-levered equities should rejoice," Scotiabank said in a
note.
K+S is spending 3.25 billion Canadian dollars ($2.64 billion) on
a project in Saskatchewan that could produce some 2.9 million
metric tons of potash a year by 2023, according to the company.
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 price of potash 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 boom encouraged a round of mine
building that is likely to bring new supply onto the market over
the next five years, at a time when demand is likely to stay
flat.
Analysts believe that Potash Corp. would also try to spin off
the salt business of K+S should it be successful.
Ulrike Dauer in Frankfurt contributed to this article.
Write to Alistair MacDonald at alistair.macdonald@wsj.com and
Eyk Henning at eyk.henning@wsj.com
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