Potash looks like Cadbury, without the chocolate

By Rob Cox
October 29, 2010

Not much binds fertilizer and chocolate. But Potash Corp’s battle against mega-miner BHP’s hostile takeover bears a striking resemblance to the one British candy-bar maker Cadbury unsuccessfully waged against Kraft Foods a year ago. The similarities include a lack of competing bids, lots of political Sturm und Drang and antsy shareholders. Potash shareholders would be wise to consider how the Cadbury situation played out.

Like BHP, Kraft took its first offer for Cadbury directly to shareholders. Cadbury rejected the bid and arbitrageurs lifted the shares above the price on the table. The usual M&A defensive dance then kicked off, with Cadbury arguing its performance warranted a higher valuation, while at the same time searching for rival bidders.

Potash has followed the Cadbury script. It rejected BHP, is highlighting its merits (including robust third-quarter numbers on Thursday) and sent bankers roaming the earth for competing bids. But like Cadbury, which failed to drum up sufficient interest from Hershey or Ferrero, Potash seems to have exhausted its white knight chances.

The defense now rests on politics. Saskatchewan, the province that once owned Potash, has urged Ottawa to reject the offer under the Investment Canada Act, which requires that foreign investments are a “net benefit” to the nation. That has set off the horse trading.

To win Canada’s support, BHP has promised not to use losses from a potash project it’s developing to reduce its tax bill and to limit its target’s net debt to help protect provincial finances. Kraft, too, made promises, including at least one that it reneged upon, to appease British politicians, including cabinet minister Peter Mandelson, worried about a Cadbury takeover’s impact on jobs.

Canada could still block BHP next week. But politics aside, it’s hard to see on what basis. That would leave the decision to Potash shareholders. The Cadbury deal is once again instructive here. Kraft’s first bid came in at a 31 percent premium. In the end, Kraft offered 50 percent more than the company was worth before it tipped its hand.

BHP’s first offer represented a 16 percent premium. To match Kraft’s increase from first to final bid implies a BHP offer of around $155 a share, or some 6 percent above the current price. The difficulty of BHP justifying that to its own shareholders may be the Achilles heel Saskatchewanians need to rely upon.


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Not sure who all the Breakingviews authors are, but I have to say most of the articles (including this one) are vapid and without substance. It takes a special ignorance to completely disregard the precedent set in the last five years by giant miners picking off Canadian companies. The legacy of BS they’ve spewed to get their way, reneging as soon as it suits them, is hardly a small piece of politics. Throw in the billions in lost tax revenue to Canada and the ridiculously lowball bid… this deal deserves to get laughed down all the way to the gutter. This saga will most likely go on for years since investors are not likely to pony up their shares for such an unvalued bid and end in tears for BHP. The era of LBOs is nearing its end, and BHP can’t possibly borrow $55-60B it would take to get this deal done. They had $40B on tap from the potential Rio deal, but that was already pushing the limit of their borrowing capabilities.

Posted by CDN_finance | Report as abusive

Your elquent comparison has a glaring spreadsheet omission. What makes this takeover different is 1 million Saskatchewan residents united in 1 magnified NO.
This is the politics of the people. The script is ours and it is 2 letters long.

Posted by saskwriter | Report as abusive

Looks liked a mixed article , please write clearly – Explain cadbury deal and than explain potash deal.

Mixing both these deals together creates confusion to reader and irritates them instead of reading the article.



Posted by ma2416 | Report as abusive