Image: PotashCorp.
The fertilizer industry has struggled for a long time now, as weakening conditions in the agricultural industry have reduced demand for the potash-based products that PotashCorp (POT) and its major peers in the industry produce. Nevertheless, PotashCorp continues to see plenty of long-term potential in the fertilizer industry, and its proposed deal to pay $8.9 billion to acquire Germany's K+S looked like a major plank of PotashCorp's growth strategy going forward. After more than three months of trying to find common ground, however, PotashCorp pulled the plug on its K+S merger plans, vowing to move forward in other directions. For the most part, shareholders didn't share any disappointment that PotashCorp executives might have had over the failed deal. Let's look more closely at why PotashCorp decided to give up on K+S and what could lie ahead for the fertilizer giant in the near future.
Killing the deal
The press release that PotashCorp issued over the weekend was terse, but it certainly communicated some of the frustration that the company has had with K+S throughout the process. "Our proposal reflected full and fair value," PotashCorp CEO Jochen Tilk said, "and was predicated on a collaborative process with access to customary due diligence." By contrast, Tilk said that "a lack of engagement by K+S management" played a role in the Canadian company's decision to stop pursuing its takeover plans.
That the K+S negotiations never went as smoothly as hoped was obvious even early on in the deal's timeline. Just a week after confirming its friendly takeover bid, PotashCorp defended its bid against a K+S statement, asserting that the would-be buyer intended to keep the target's asset and employee base intact rather than seeking to close mines, cut production, sell off noncore assets like K+S's salt business, or laying off workers. "We believe that the combination of our two companies would create a well-capitalized, more diversified company," Tilk said, and "we believe this creates greater opportunities and security for all employees."
Still, the public K+S rejection of the takeover bid left little room for further discussion. As K+S CEO Norbert Steiner said, "Not only does this proposal undervalue our potash and magnesium products and our salt business, it completely disregards the value of our Legacy Project" in southern Saskatchewan. Company management remained convinced that the weak share price K+S had suffered didn't yet reflect all the effort that it had spent in working on the project, which it expects will start producing potash as early as the middle of next year.
It's clear that K+S shareholders were disappointed with the result, as the stock lost a quarter of its value Monday in returning to levels it hadn't seen since last 2014. The opportunity to potentially get the original 41 euro per share offer despite a big decline in commodity-related stocks during the period in which K+S was presumably considering the deal clearly would have given shareholders a great exit, at least when judged in a short-term context.
Looking forward
For PotashCorp shareholders, the decision to give up on the deal was far more positive. The stock climbed nearly 3% early Monday as investors praised the company's decision not to press further and make more financial concessions in order to try to consummate a deal with K+S. Given the mistakes that other companies have made in similar situations in the past, avoiding the potential downside of overpaying for a deal under industry conditions that are already far from ideal seems like a prudent move for PotashCorp management.
Now, the question is where PotashCorp goes from here. The agricultural market shows few signs of recovering anytime soon, and that in turn could hold back any rebound in fertilizer pricing and demand. Yet the company remains optimistic, believing that it has a sustainable competitive advantage against its peers that should help it outperform its competitors and take advantage of better conditions whenever they arise in the future.
PotashCorp might not have won the battle for K+S, but investors should still be happy about the way it fought for the deal. By staying disciplined, PotashCorp will leave itself in the best position to take advantage of other opportunities well into the future.
