Potash Corporation of Saskatchewan: A Takeover Bid Focuses Attention on the Potash Market

Series: Yale School of Management
Format: Cooked, .pdf file
Topics: Finance, Competition and Strategy, Economics, Global Business, Public Policy, Mining
Initial date of publication: October 2011
Geographic setting of case: Canada
Access:  Available to educational institutions by emailing case.comments@yale.edu. Teaching Note available to faculty at accredited business schools.

Overview: In August of 2010, BHP Billiton, the Australia-based mining giant, launched a $38.6 billion hostile bid to take over the Potash Corporation of Saskatchewan (PotashCorp). The takeover, one of the largest to be attempted since the onset of the global recession in 2008, focused unaccustomed attention on both potash, a vital fertilizer, and Saskatchewan, the lightly-populated Canadian province under whose surface a large percentage of the earth’s potash reserves were located.

PotashCorp’s management rejected the BHP bid, a scant 17% over its share price, as insultingly low. The potash market had been on a rollercoaster over the past years. Potash spot market prices had reached an all time peak in March of 2009 and then crashed by some 60% over the next few months. PotashCorp’s management charged BHP with trying to take advantage of a temporary market anomaly to “steal” the company. The company argued that the fundamentals for potash prices remained strong—the developing world’s need to boost agricultural yields would fuel demand and the cost and long time required to develop a mine would constrain supply. PotashCorp, the company with the world’s largest capacity for producing potash, argued that it was uniquely positioned to take advantage of the market as it recovered.

The BHP bid concerned Saskatchewan’s provincial government. Historically, the government had been financially and organizationally interconnected with potash production. In addition to normal corporate income tax, the government collected a potash royalty that contributed about four percent of all its revenues. PotashCorp itself was a government-created entity. While the government had sold its shares in 1988, PotashCorp remained the lead member of Canpotex, a government-organized cartel that bought and marketed all of Saskatchewan’s potash to overseas customers. Believing BHP would take PotashCorp out of Canpotex as well as hurt the province’s revenues from potash royalties, Saskatchewan Premier Brad Wall announced his opposition to the sale.

Surprisingly, the Canadian federal government agreed with the province. BHP had expected that the federal government would offer no resistance to the bid since it was headed by conservative, pro-business Prime Minister Stephen Harper. Harper’s government had approved four previous takeovers of Canadian mining companies by foreign suitors, arguing that “Canada was open for business.” Nonetheless when it came to the BHP bid, the prime minister’s government ruled that the proposed deal was “not in the best interests of Canada.” Soon after the federal government’s assessment, BHP withdrew its bid.

But the interest in potash engendered by the takeover attempt fueled continuing controversy. Observers wondered:  What were the PotashCorp’s prospects over the coming years and what was its true value? Why had potash prices been so volatile?  Would they ever settle down and at what level? How should PotashCorp manage its production and marketing of potash? How would the entry of mining giants like BHP affect the potash market?