Conventional underground mining accounts for almost 80% of global potash capacity. Photo: PotashCorp. 

German potash producer K+S had steadfastly rejected the $8.7 billion takeover offer from Canadian rival PotashCorp of Saskatchewan (NYSE: POT) because it severely undervalued the company, particularly its potentially lucrative Legacy mine in PotashCorp's backyard, and now it got its wish: PotashCorp has withdrawn the offer.

Although K+S contended PotashCorp tried to gain control of the mine as a means of limiting output from it in an effort to prop up potash prices, that ignored the industry's weakening condition. Instead PotashCorp's offer was vastly overpricing its value and it risked angering its by overpaying for an asset with declining values.

A nasty divorce
Potash prices have been depressed ever since Russian potash producer Uralkali ended its distribution agreement with joint venture partner Belaruskali in a bid to gain market share. The two had controlled roughly 43% of global potash exports, but following the split potash prices plunged from nearly $400 per tonne to $305 last year.

Producers thought they might be able to negotiate higher prices from customers this year, but Belaruskali signed a deal with China for just $315 a tonne to ensure its market position and Uralkali acquiesced immediately after with its own similar deal.

That boxed in Canpotex, the marketing organization for PotashCorp, Mosaic (NYSE: MOS), and Agrium, which ended up signing its own agreements with China with bids at "current competitive levels."

Spot potash prices, however, continue to fall and were going for around $303 per tonne as of the end of August.

Closing up shop
Potash producers are slamming the brakes on production in response. Mosaic recently walked back its full year 2015 guidance it issued only in August when it released second quarter earnings. Where it expected to see potash volumes in the 1.6 million to 2.0 million tonne range and prices between $260 to $280 per tonne, it now says they'll be in the lower half of those ranges respectively. In comparison, PotashCorp said it realized potash prices of $273 per tonne for the second quarter.

In response, Mosaic is now cutting potash production at its Colonsay mine in Canada by extending the mine's maintenance downtime.

Similarly, mining giant BHP Billiton has put off expectations on when its huge Janssen mine in Saskatchewan will begin production until 2020. BHP holds exploration rights to more than 14,500 square kilometers in Canada's Saskatchewan potash basin and has made potash its "fifth pillar" of its investment strategy.

Ulterior motives
K+S thought the real reason PotashCorp wanted to acquire it was to sacrifice the German company for the sake of profits at the Canadian miner. K+S still plans to bring the Legacy mine online next year.

PotashCorp had attempted to mollify its critics by assuring its offer was not about cutting jobs, closing mines, or even selling K+S's Morton's salt business, maintaining it would continue with the Legacy project and even export its output through Canpotex. It even went so far as to guarantee it wouldn't not fire any K+S workers if the deal went through and would not close down any projects for five years.

But in the face of K+S management's intransigence about negotiating an acceptable offer and the deteriorating state of the market, there was little sense in moving forward. In a statement on withdrawing the offer, PotashCorp CEO Jochen Tilk commented on the loss of market value by potash peers and said, "In light of these market conditions and a lack of engagement by K+S management, we have concluded that continued pursuit of a combination is no longer in the best interests of our shareholders."

A pricey proposition
Since its offer in late June, PotashCorp's stock has lost a third of its value and prices are expected to weaken further. The sharp elbows of the competitive industry may yet cause a scramble for share through greater production, weakening the players more. Spending $8.7 billion amid a market in turmoil would have created significant investor backlash, not unlike what happened in gold when miners such as Barrick Gold vastly overpaid for acquisitions that, following the yellow metal's price collapse, forced it to have to write down billions in assets.

There is still value in K+S and its Legacy mine, particularly over its 20-year estimated life span, but not at any price. And that means K+S investors are only left looking back wistfully at PotashCorp's multibillion offer and what could have been a profitable merger deal.