FERTILIZER WARS

It appears that the potash sweepstakes are over.  As reported earlier, the Canadian Federal Government flagged BHPB's bid on 4 November, and now that bid has been officially withdrawn.  No other bids have surfaced, and they would seemingly be moot at this point anyhow.

As the dust settles, various stakeholders will be assessing their positions.  The investment bankers and lawyers are of course winners, as they have a payday no matter what.  Past this we are not sure who benefits.  PotashCorp's shareholders, who were probably hoping for a bidding war and a payout, are likely disappointed.  Prognosticating further... we would guess that potash prices are going up, as well as BHPB's shares.  On the other hand, PotashCorp shares will probably linger.  The markets will tell us more as time passes.

BHPB's withdrawal press release  is quite informative, outlining the significant commitments that they were willing to make to the Canadian Federal and the Saskatchewan Provincial Governments to earn their "Social License".  The Federal Government is also expected to elaborate on why BHPB's offer proposal was rejected, as well as to provide "guidance" to investors on what kinds of foreign takeovers it will tolerate  going forward.    

No doubt both pundits and punters will be sifting through the ashes of this deal for some time to come.     

The Potash War seems to be reaching a final stage.  Still absent though from the battlefield is the promised White Knight...or even a White Squire for that matter.   Yet the time is nigh with nationalistic emotions running high.   Prairie politicians and the local press are for the most part objecting to the sale of this "national asset"; seemingly overlooking the fact that the Provence of Saskatchewan sold PotashCorp to the public in 1989.

At the other extreme, we have a post on the Deal Blog in The New York Times titled:  In Potash War, Is Saskatchewan the New Venezuela?

Nationalism and Ponzi politics aside, the fundamental problem seems to be about... surprise, surprise...money.   The potash industry is a major revenue source for the Saskatchewan Government.  Somewhat at odds with this are the interests of PotashCorp's shareholders (widows, children and all).     If the Canadian Government materially blocks the Aussie Fossickers for nationalistic reasons, they will in effect impair the value of PotashCorp's shares for some time to come, basically putting a glass ceiling over them.   The stock market seems to be already baking this discount into PotashCorp's shares as they have been underperforming the market and their peers of late. 

While we feel comfortable commenting on the economic aspects of this debate, we are going to leave it to a blog post and video on Canada's Business News Network, to further address the Canadian nuances: Examining PotashCorp patriotism.

There have been significant developments in the battle for supremacy of the Potash world in the last week.  The Monday issuance of the much awaited

 Some of the trade press picked up on a tax nuance that would benefit BHPB if they operated both PotashCorp and continued to develop the Jansen Project.   Governments make up tax laws on the fly.  An extremely good example in fact is the royalty and taxation scheme that is already in place for the Saskatchewan potash industry.    We would also suggest that this question is moot as we don't expect that Jansen will remain in BHPB's portfolio if they are successful. 

In our last post we predicted some selling pressure.   Tangentially, it now appears that PotashCorp's recently retired Chief Operating Officer has been a significant seller at recent market highs.   His timing was pretty good given recent softness in POT shares.   

And finally we have the entry of the plaintiff's bar into the fray; defending the rights of widows and orphans...and Hedge Funds with the filing of a class action suit.  This firm has some pretty famous scalps  on their trophy wall.  Our uneducated guess is that their current filing will get some traction.  If nothing else the complaint  makes for interesting reading for the "Pot watchers" amongst us.

We have been reflecting for the last several days over allegations in the press accusing BHPB of "unethical behavior".  We had previously characterized the current Potash Battle as mano a mano combat between chivalrous gladiators adhering to "...the Queensberry Rules of M&A". Unfortunately, it appears that we may have been very wrong.  Reportedly BHPB was caught red handed in the market...actually calling on customers.  Can you believe that? 

We have to side with PotashCorp on this one.  Really, what sort of potash salesman would ever even consider calling on a customer...let alone "cold calling" on someone else's customers?    Whatever happened to honor amongst monopolists?

The current battle in the ongoing fertilizer wars has provided industry watchers with some colorful entertainment.    In contrast, the recent CF - Terra - Agrium contest was a methodical war of attrition and tactics, featuring lawyers, investment bankers...and death by press release.     

In the Potash Battle we have colorful gladiators hacking away at each other with dueling press conferences, challenging the Queensberry Rules of M&A.   The round-off error is Billions not Millions and they are on a world stage.  

Surrogates have entered the battle.  Governments of various stripe are taking positions both to protect the potash prairies, and as potential buyers. 

The Provincial government is arguing to protect Canpotex, a monopoly marketing association while we have BHPB, a major multinational resisting pressure to join the association; which no doubt they would control...

"Oh please Br'er Fox, whatever you do, please don't throw me into the briar patch."  Br'er Rabbit

Where do we go from here?  In our opinion, PotashCorp is in play; Bill Doyle has admitted as much (Washington Post 18 August 10).  In an otherwise horrible equity market, this is one opportunity for the hedge funds to turn a profitable trade.  So it appears to be just a matter of price...but who can claim to have ever gotten an easy price from Bill Doyle?

Therefore what is the market potential for the "The Saudi Arabia of Potash"   (PotashCorp presentation 17 August 10)?   This deal is too big for potential financial buyers as today's credit markets won't support a deal this size.  So this leaves strategic buyers and this list is pretty short as Marius Kloppers has pointed out.    Does the Saskatchewan Government really want the Chinese government, or other buyer aligned entities, as their potash partner?   

Can and will BHPB raise their bid if they have to?  You bet.

Nothing strikes greater fear than the Great White Shark, arguably the most ferocious predator in the sea.  For many months an Australian Great White has been patrolling Canadian waters, nibbling on the occasional penny stock, biding its time.   When a shark feeds it is often its prey that one sees first... fleeing in terror.

This morning the financial press headlines lead with announcements that PotashCorp was rejecting BHB Billiton's unsolicited offer.  There has been no official breach from BHPB yet.  And surprisingly the usually alert Aussie financial press is behind the news cycle.

PotashCorp at the same announced that they had adopted a "Shareholder Rights Plan".   Some cynics amongst us might be tempted to call this a "Poison Pill".  They will also wonder aloud why, if this plan was so much in the interest of the shareholders, that it had not been adopted a long time ago.

We first visited this theme back in March with a similar post on www.FertilizerWorks.com.  Five months later, we are now finally seeing some real cash on the table...or at least some promises of cash.

Last Wednesday CF sweetened their offer to Terra's shareholders, at the same time offering a block of "contingent future shares" to existing CF shareholders.  They also promised at least a billion bucks to all shareholders after a merger.   While it is not your Grandfather's typical merger offer, in our opinion, it is on the money for the majority of the professional investors who now dominate the ownership of both of these companies.

Most importantly, as time has passed CF has apparently come to terms with the Federal Trade Commission.  This is not an insignificant accomplishment given the anti-merger anxiety across the heartland.

The next move is Terra's and they have signaled that their ".... Board of Directors will consider CF Industries' latest proposal at a meeting to be held prior to the end of the month.''   The Wall Street Journal's Deal Blog immediately picked up on this nuanced wording: CF-Terra: Is There Light at the End of the Tunnel?

We agree; the CF-Terra merger has now picked up some detectable momentum.  In the meantime, we have also heard recent rumors of White Knights stalking.  Is that you Lord Darth?

The Obama administration's new Antitrust Czar has firmly set the tone of future antitrust policy with back to back speeches in Washington this week.  There is no question...and no surprise...that the respite of Laissez-faire enjoyed by big business during the Bush administration is over.  What remains to be seen is just how tough the new antitrust policy is going to be.  The Los Angeles Times predicts a return to "... the type of aggressive antitrust enforcement of the 1990s."  This may be wishful thinking.  While Christine Varney was a key member of the Clinton administration, she is now working for a much more liberal White House.  And she seems to be walking the new talk, taking the position that our current economic woes are in significant measure a result of relaxed antitrust enforcement. 

Of most importance to our industry is the Wall Street Journal's coverage of these changes with an article today that focuses at length on our Fertilizer Wars: "One combination antitrust experts say could face an uphill battle under the new guidelines is Agrium's proposed acquisition of CF Industries..."  Stay tuned.

Last week CF shareholders ignored Agrium's plea to withhold votes; re-electing three nominated directors.  This was a painful setback for Agrium, their anxiety apparent in the subsequent spin.

Whining aside, 80% plus of CF's shareholders clearly indicated with their vote that they weren't even closely interested in Agrium's entreaties.   It is also important to note that ~88% of CF is owned by institutions; in other words presumably sophisticated investors.

In our view, this victory offers CF and Terra a brief window of opportunity to get about closing a deal.  Both sides have to get out of the trenches and engage.   Time is of the essence as other fundamental factors loom large on their horizon.

There is a level of anxiety in rural America about the continuing consolidation in agriculture and the fundamental impact that it is having on rural life.  Considerable and vocal grassroots resistance has especially been developing towards the ongoing consolidation in the fertilizer industry.   The proposed fertilizer mergers will be amongst the first confronted by the Obama administration.   At this point we think that CF - Terra will be approved, after some meaningful surgery.

The compelling argument that needs to be made to the administration is that American nitrogen production has been under attack for the last decade.  We have lost a large percentage of our production capacity, and more is at risk.  Over 50% of our consumption is now imported.  World market conditions will insure that the American farmer has competitive nitrogen.  What is of concern is the viability of our remaining production capacity.

The news for the foreseeable future is even more difficult.  Cap and Trade legislation, now inevitable, will be a triple whammy for North American nitrogen producers.  Not only will they have to pay a significant carbon "tax" estimated to be $30 per ton, but they will also have to compete with imported product which will, for the most part, not be carrying this burden.     Furthermore, they will have to compete even more aggressively for feedstock, as other industries switch to natural gas, to reduce their own carbon tax exposure.

Therefore for the shareholders (and stakeholders), CF and Terra need to make peace and circle the wagons.    The Trinidadians are coming...as well as the Venezuelans, Chinese, Indonesians, Russians, Ukrainians, Kuwaitis, Qataris, Egyptians, Saudis...

Read more...

Green Markets closed their poll on Wednesday last week in order to sort through and analyze the surge of votes that they were receiving.  At that point the existence of the poll was just starting to circulate beyond Green Markets' circulation.  Had the poll been left open there is no doubt in our mind that the results would have been even more lopsided than those reflected above.  When studying these results it is important to note that a significant percentage of those in the North American retail sector are already receiving an Agrium paycheck.   It is also interesting to see the noticeable anti merger vote amongst even those in the fertilizer producer category.

As they have been saying for centuries, "a picture is worth a thousand words."

Unfortunately missing from this picture is a direct sense of grower views on the subject.    But a separate poll is not needed to measure what farmers are thinking.   Instead we suggest waiting a few days for the announcements of Fertilizer Producers' FY Q3 earnings.  We expect that then there will be a little less bravado in the air.

It appears that the "Green Sheet" has finally discovered that one of the biggest stories on Wall Street is unfolding in their own back yard.  No doubt covering the Fertilizer Wars will be a challenge for the Green Markets team, as they too could become casualties.  Trade rag subscriptions are as difficult to find these days as cheap potash in our consolidating industry.

Gingerly trying to discern market sentiment they launched an abbreviated internet poll last Friday.  Given their focused subscription base, we would suspect that this exercise will produce results similar to polling a church choir about the merits of regular church attendance...but we will see.

As they say in Chicago "Make sure that you vote...and vote often."

 Click here for larger image.

The fertilizer business used to be a gentlemen's sport, with its own set of Queensberry rules. Competition was vigorous, but there was also a level of mutual respect.  The industry's culture was best reflected by the smooth polished style of the Greenbrier Resort in West Virginia where the industry used to assemble to overflow capacity every May for an annual conference.

Your word was your bond.  You worked hard, and played hard.  You wanted to "win" but certainly not at all costs.  You looked after your friends.   Everyone knew that what went around came around.

Now with consolidation, we are an industry more and more focusing it seems on short term gain at the expense of longer term visions such as "Nourish, Replenish, Grow."

There was a time in our industry when attack ads like the ones that Agrium ran against CF's management and board this week were inconceivable.  Possibly because then our values were Main Street... not Wall Street.