Potash Corp - An Acquisition of Israel Chemicals?

A number of outlets are reporting that Potash Corp is in discussions with the Israeli government about acquiring or merging with Israel Chemicals Corporation.  Potash Corp already owns 14% of the company, has long intended to gain control of ICL, and management has recently been hinting at M & A opportunities that they're exploring.  Still, the news took some by surprise.  After all, fertilizer is a strategically important asset, and after BHP Billiton's offer for Potash Corp in 2010 was rejected, many expected it to be a long time before any similar attempts were made.  That CEO Bill Doyle has met in person with Prime Minister Benjamin Netanyahu suggests that the matter is being seriously considered by the Israeli government, though.
 
Despite Potash Corp's sterling record of capital allocation in general, and common stock investing in particular, shareholders should be wary.  Reports suggest that Potash Corp is considering issuing stock to fund the acquisition.  Using stock as a form of currency can only be justified if that currency is fully valued, or overvalued.  Potash Corp stock, however, is currently very cheap.  It's possible of course that ICL's stock is trading at an even more discounted price, but that's unlikely to remain the case when a takeover premium is added.

Reports suggest that it will cost Potash Corp around $13 billion to gain control of the remaining stock, making ICL too big to acquire with cash.  If a company is too big to acquire, though, a deal should not be pursued.  At $40 per share, Potash Corp would have to issue an additional 325 million shares, diluting current shareholders by 38%.  Management has indicated that if they see no hope of eventually gaining control of the companies they hold minority interests in, they would exit their position(s). 

If Potash Corp were to sell their position in Israel Chemicals Corp at current prices, and used the proceeds to repurchase its own stock, it might reduce shares outstanding by around 4%, after accounting for taxes.  There is scant evidence that the market has ever rewarded Potash Corp for its stock investments, so it’s difficult to argue that POT's stock would suffer.  EPS, though, would increase by a noticeable, but not dramatic, amount.  And by reinvesting in their own assets, which they are intimately familiar with, Potash Corp would also be making a less risky move. 

It's difficult to draw any firm conclusions until the terms of a deal are made official, but there's reason to fear that Potash Corp is about to make an expensive mistake.  Government intervention saved Potash Corp shareholders from a low bid a couple years back; many investors will now be hoping that government intervention prevents their firm from paying too much.

My original write-up on Potash Corp is here.

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.

Potash Corp - 2012 Third Quarter Update

Among the reasons that many investors prefer potash to other minerals and commodities is that it tends to be less volatile - in terms of both prices and volumes.  In many cases, that's true.  The potash industry, however, remains a lumpy business.  The soft results of the third quarter - EPS was $0.74, down from $0.94 in the year-ago quarter - are a result of demand lumpiness from both China and India.  Prices have remained quite firm, though, at $429 per tonne, in line with the second quarter, though down about 5% from a year ago.

In China, demand for seaborne potash has been weak in recent months, as the country meets in near-term needs by drawing down domestic inventories, as well as increasing purchases of more locally sourced production.  The Chinese are very shrewd negotiators, and some of their recent behavior is motivated by the desire to purchase fertilizer at lower prices.  Ultimately, however, Chinese demand for potash increases every year, and short-term tactics to gain negotiating leverage do not change the long-term supply-and-demand equation, which favors suppliers.  Potash Corp management - along with the other members of Canpotex - has elected to counter reduced demand with reduced supply, and pledged to continue doing so into next year, despite the ever-growing gulf between the company’s capacity and its actual production.

India poses a different and trickier problem.  Indian fertilizer buyers depend on heavy government subsidies.  The subsidy regime, though, has been reorganized in the past year, and now favors outlays on nitrogen-based products, at the cost of potash.  But Indian crops face a widening fertilizer imbalance, where the proportion of potash as a percentage of overall fertilizer inputs is far below the scientifically recommended number.  In consequence, India's yields are far below those enjoyed elsewhere in the world.  Over time, this problem will be corrected, but given the political element to it, how and when any remedial action plays out is unclear.

Happily for shareholders, potash demand is robust in virtually all areas outside of China and India, particularly in North America and Brazil.  Given that the two countries have a combined 2.5 billion mouths to feed, and relatively high food inflation, it’s only a matter of time before agreements are signed and potash shipments resume.

As Potash Corp moves closer to completing its large, long-running capex program, the company will begin to generate substantial amounts of free cash flow, especially compared to today's stock price.  Management recently approved a significant increase of the dividend, to $0.21 per quarter, a 2.1% dividend yield at the current share price.  Though significant, a dividend payout at that level leaves ample room for further dividend increases, share repurchases and acquisitions (management reaffirmed their long-term intention to take control of one or more of the companies that Potash Corp owns common stock positions in).

My original write-up on Potash Corp is here.

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.