Potash Corp./Saskatchewan Inc. (TSX:POT)(NYSE:POT) is already the largest potash producer in the world as it controls 20% of worldwide capacity. However, it’s angling to control an even larger portion of the market; it’s seeking to buy German rival K+S AG. While K+S has reportedly rejected Potash Corp.’s initial offer, it’s a deal that could eventually be worked out. That said, the question that remains is if it’s the right deal for the company to make.
Why does Potash Corp. want to buy K+S?
The main reason why Potash Corp. is seeking to acquire K+S is because the deal would boost its control of worldwide potash capacity up to 30%. Most of that current capacity is in Europe, where Potash Corp. has little capacity. However, K+S is in the middle of constructing a new potash mine in Canada, which is expected to begin producing next year. It’s that mine in particular that Potash Corp. would love to bring into the fold to go with its own five large potash mines in the country.
In addition to that, K+S is also a market-leading salt producer. That salt division would further diversify Potash Corp.’s operations beyond the crop nutrients of potash, phosphate, and nitrogen.
Troubles ahead
According to reports, Potash Corp. is offering a 60% premium to buy out K+S. That said, one of the reasons the premium is so high is because of the pressure the industry has been under over the past couple of years due to overcapacity. In fact, it’s that overcapacity issue that could potentially be the catalyst behind this deal as K+S has some high-cost legacy mines in Germany that could close until potash prices begin to rebound, which would tighten capacity.
The strategic benefits aside, the potential sticking point with this deal is the fact that Potash Corp. has already tried to buy K+S once before. In 1997 it attempted to acquire a majority stake in the company, only to have the deal nixed by German regulators due to anti-competitive concerns.
Not only that, but Potash Corp. itself was part of a nixed takeover battle a couple of years ago after the Canadian government said that deal wouldn’t provide a “net benefit” to Canada. Germany might not see a net benefit to the deal if there is the potential for mines to be closed in the country, which is what Potash Corp. might want to do reduce industry capacity and push potash prices higher.
Investor takeaway
From the looks of things, it is going to be very difficult for Potash Corp. to seal this deal. Not only does it have to first agree to an acceptable merger agreement with K+S at an even higher premium, but it would then have to sell the deal to German regulators. So, while the deal looks good on paper as it would give Potash Corp. an even bigger slice of the global potash market and diversify its operations into salt, the likelihood of a deal actually closing doesn’t look promising.
Further, to get to that point the company would have to give up a lot, which could significantly reduce its ability to actually create long-term value for its investors. That’s why I’m not so sure this is the right deal for the company to make.
