There is nothing wrong with playing hard to get, particularly if you are the prettiest girl at the dance. BHP Billiton's $39bn, $130 a share cash offer for PotashCorp was greeted with derision and a “shareholder rights plan”, a euphemism for a poison pill. But it is more of a prophylactic, putting the onus on BHP to come up with a bigger sum.
The compelling cyclical and secular backdrop for fertiliser demand – rising populations and grain demand and limited arable land – are not the only reasons mining companies BHP, Vale and Rio Tinto covet mineral fertilisers. It is a nice way for them to remain within their core competencies while diversifying from industrial materials. BHP already has large potash deposits but production remains years away. To get meaningful exposure today for a company of its size, PotashCorp is the only game in town.
Traders grasped this immediately, sending PotashCorp $12 above the offer price. If BHP returns with the “big boy” price Potash's chief wants, shareholders should be realistic. The 230 per cent return they earned in the first eight and a half years of the last decade, valuing Potash at $240 a share or 55 times prospective earnings, evaporated in just six months. Fundamentals are again solid but BHP will not accept peak commodity bubble valuations as a benchmark. Even on PotashCorp's rosy projections, that would put the shares at more than six times 2015 enterprise value to earnings before interest, tax, depreciation and amortisation at what may be the peak of the cycle.