BHP has offered $130 per share for Potash Corp, yet the market is already betting that the Australian mining giant will have to hike its offer price, given that Potash shares are now around $143.
So, beyond debating whether buying Potash is even a good deal for BHP, can BHP afford to pay even more for POT? How much powder does BHP actually have?
A lot, according to Ambrian. Never underestimate a broker/banker’s ability to dream of an even higher acquisition price:
Using a hypothetical 6% bond we envisaged in the above examination, it would appear that from a financing perspective, BHPB can comfortably afford to pay more for securing a business that lays claim to 20% of global potash capacity. We estimate that BHPB could pay anywhere between US$145/sh (last night’s close) and up to US$200/sh for PotashCorp depending on the interest rate it can sell our hypothetical bond for. I.e. instead of the US$39Bn implied by the first offer, we think that BHPB could pay up to US$60Bn at a 6% interest rate before becoming earnings dilutive or… if the bond was issued at 9% – Anglo American’s last bond – BHPB could afford to pay up to US$45Bn.
$200 a share, holy smokes. They also highlight that BHP competitor Rio Tinto theoretically has the financial ability to make a counter-bid:
Rio Tinto could afford to pay up to approximately US$47bn for PotashCorp (our forecast for BHPB was that it could afford up to US$60bn) before it becomes earnings dilutive (looking at next year’s earnings).
Nonetheless, Ambrian doesn’t expect a counter offer from Rio, given the disastrous Alcan acquisition they did pre-crisis, which almost brought down the entire company during the crisis.
We agree, it would be hilariously sad if Rio came in and started a bidding war, given the company’s history.
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