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BHP Said to Weigh Hostile Bid for Potash After Offer Rejected

BHP Billiton Ltd. may take its $39 billion bid for Potash Corp. of Saskatchewan Inc. directly to shareholders this week after having its unsolicited offer rejected, said two people with direct knowledge of the matter.

BHP, the world’s largest mining company, is unlikely to raise its $130-a-share bid before talks with investors, though a final decision hasn’t been made, said the people, who declined to be identified because the plan isn’t public.

Potash Corp., the world’s largest fertilizer producer, rose to $143.17 in New York trading yesterday, indicating BHP Chief Executive Officer Marius Kloppers, 47, may have to raise his bid to win over investors. Rising food demand and adverse weather have driven up the prices for corn, soybeans and wheat by as much as 40 percent since June, and potash consumption may rise at least 10 percent next year, Potash CEO Bill Doyle, 60, said.

“Potash is in play now,” said Prasad Patkar, who helps manage about $1.6 billion at Platypus Asset Management Pty in Sydney, including BHP shares. “Price action overnight on Potash tells you that a higher bid is coming. You can’t rule out BHP going hostile.”

BHP fell 3.6 percent to A$38.77 at 12:32 p.m. Sydney time on the Australian stock exchange. The cost of protecting its bonds from default rose the most in more than three months. Credit-default swaps on BHP jumped 15 basis points to 87.5 basis points as of 10:14 a.m. in Sydney, the biggest gain since May 7, according to prices from Nomura Holdings Inc. and CMA.

Record Price

Potash Corp.’s Doyle, speaking on a conference call with analysts, called the timing of BHP’s bid “highly opportunistic and an ill-disguised attempt to exploit an anomaly in the equity market valuation.” He adopted a shareholder rights plan as a defense and said the bid was “grossly inadequate.”

Shares of the Saskatoon, Saskatchewan-based company jumped 28 percent in New York Stock Exchange composite trading yesterday. BHP’s bid is 16 percent more than Potash Corp.’s closing share price on Aug. 16.

“Population growth and scarcity of resources along with high barriers to entry are potentially supportive of higher prices longer term,” said Lyndon Fagan, an analyst at Royal Bank of Scotland Group Plc. “The potash industry in Canada is an attractive place to be.”

Biggest Acquisition

The proposed takeover, with an announced value of $43.6 billion including debt, would be the biggest since Merck & Co. proposed to buy rival drugmaker Schering-Plough Corp. in March 2009 for $47.1 billion. A successful takeover of Potash Corp. would be BHP’s biggest ever acquisition after Kloppers scrapped a $66 billion hostile takeover for Rio Tinto Group in 2008.

The value of mining companies targeted in deals this year totaled $67 billion before the BHP bid, according to data compiled by Bloomberg. That makes it the third-most-active industry for deals in 2010, after telecommunications with $109.4 billion and oil and gas with $108.6 billion.

Buying Potash Corp. would propel BHP to the top of the league of producers of potash. The mineral is a form of potassium used by farmers to help boost crop yields by improving the ability of plants to withstand dry soil conditions. Potash Corp. has the capacity to produce more than 10 million tons of potash a year, mostly from mines in Saskatchewan.

Ruban Yogarajah, a spokesman for BHP, declined to comment on the company’s strategy. Bill Johnson, a Potash Corp. spokesman, also declined to comment.

$180 a Share?

Potash Corp.’s shareholder rights plan will prevent any party from accumulating a stake of more than 20 percent without making an offer to all stockholders.

A bid “in the $150 area would be appropriate,” Mark Gulley, a New-York based analyst at Soleil Securities Corp. who has a “hold” rating on Potash Corp., said yesterday in a Bloomberg Television interview. The company may be worth as much as $180 a share based on the replacement value of its assets, said Edlain Rodriguez, an analyst at Gleacher & Co. in New York.

“It’s going to take at least $160 a share to get Bill Doyle to the negotiating table,” Rodriguez said by phone. “He’s always said it wouldn’t be cheap.”

BHP is advised by JPMorgan Chase & Co. and TD Securities Inc. Bank of America Merrill Lynch, Goldman Sachs Group Inc. and RBC Capital Markets Ltd. are advising Potash Corp.

Brazil’s Vale SA, the world’s largest mining company after BHP measured by market capitalization, isn’t likely to get involved in a bidding war, UBS AG analysts led by Rene Kleyweg said yesterday in a note.

‘Clear Run’

“Vale does not have any strategic, operational or financial advantage over BHP,” Kleyweg said.

Rio Tinto, the third-biggest mining company, isn’t able to match BHP’s financial strength, said Anthony Rizzuto, a New York-based analyst at Dahlman Rose & Co.

“There’s probably a clear run for BHP should they decide to increase the bid,” said Tony Robson, an analyst at BMO Capital Markets in Toronto who has an “outperform” rating on BHP’s shares.

BHP said in June its Jansen project in Saskatchewan contains about 3.37 billion metric tons of potash. The project is in the feasibility phase, while two other projects in the same region are at an earlier stage, the company said.

“The margins on potash are too good to ignore but the Jansen project would have added too much capacity and with all the capacity coming on line, it would kill the commodity price in the mid-term,” said Chris Damas, an independent Barrie, Ontario-based equity analyst at BCMI Research.