BHP Billiton has withdrawn its $40 billion bid for Canada's Potash Corporation of Saskatchewan. Minister of Industry Tony Clement did not see a net benefit to Canada, despite seemingly very generous concessions and undertakings on BHP's part. Clement's words effectively killed BHP's chances. It's another one that got away, in addition to the Pilbara iron ore joint venture proposal and the Rio Tinto takeover bid.
Markets don't like uncertainty, and a bid for a nonstaple commodity like potash is even worse. BHP shares had underperformed peer Rio Tinto since the Potash Corp bid was first announced. This was a bit of a punt on a global future of declining arable land and water shortage, which is highly likely but not a given--and definitely not here and now like a staple copper producer. The press is painting this as another failure in agenda for BHP CEO Marius Kloppers. To the contrary, we see a company taking sensible potshots with the discipline not to overpay or compromise for the sake of sealing a deal. That said, the costs are mounting, this time to $350 million, of which $250 million relates to the $45 billion acquisition financing facility.
Now market attention is refocussed on the most obvious of acquisitions, Australia's Woodside Petroleum, particularly since Royal Dutch Shell flagged its intention to exit, already selling down a 10% stake for $3.3 billion. Woodside is now in play, and BHP is the favoured bidder. Any move by another party is likely to spark a not-in-my-backyard response from BHP. As an Australian company, BHP has a regulatory head-start. The impediments to a foreign takeover of Woodside are not as tall as they were for Shell back in 2001, however. There are now many prospective Australia-based LNG players, both on the east and west coasts.
BHP would probably need to pay at least AUD 55 per Woodside share, a 28% premium to the market price, and potentially considerably more. It would still be a bargain. The company is better off paying cash, given its very strong balance sheet. Scrip bids are inherently more dilutionary to earnings and valuation but easier on the balance sheet. Assuming cash, leverage might peak at around 85% net debt/equity (46% net debt/net debt plus equity) before rapid paydown. Sell-down of noncore assets could accelerate the process. Synergies might allow BHP to bid a bit more.
BHP has reactivated the remaining $4.2 billion component of its previously suspended $13 billion share buyback. This could be a very efficient use of capital, particularly focussed on the London-listed stock, which trades at a chronic discount to the Australian Securities Exchange. It need not come at the expense of a Woodside bid. In fact, the uplift to earnings metrics from the buyback makes a scrip component to any Woodside takeover bid more palatable.
Mark Taylor is a senior equities analyst with Morningstar.
