A $39 Billion Food Fight

Anglo-Australian mining giant BHP Billiton made unsolicited $38.6 billion offer for the world's largest fertilizer producer, Potash Corp. of Saskatchewan Inc., in an aggressive wager that developing economies will drive up demand for the world's food supply.

Potash is an important nutrient that replenishes soil and increases farmland's crop yield. Global potash supplies are relatively limited, and Potash Corp., based in the prairies of central Canada, controls approximately 20% of the supply.

The offer is likely to set off a long struggle for the fate of the Canadian company, a crown jewel of the country's natural-resources-based economy.

Potash's board rejected the BHP offer of $130 a share in cash, a 16% premium to Potash's Monday closing price, calling it "grossly inadequate."

In trading Tuesday, the fertilizer company's shares soared far above the offer, a sign traders expect BHP to raise its bid or other suitors to emerge. Potash shares closed at $143.17, up $31.02, or 27.7%.

The company's chief executive, Bill Doyle, said the board wasn't opposed to a sale, "we just don't expect someone to come steal the company."

People familiar with the matter said BHP would decide in the next few days whether to take its offer directly to Potash shareholders, a move that would officially make BHP's unsolicited offer a hostile one.

Potash adopted a shareholder-rights plan on Tuesday that puts a 20% ceiling on any single stakeholder.

Such a "poison pill" may be less effective in Canada than in the U.S. because a hostile bidder can lobby Canadian securities regulators to have the target company eliminate its plan and allow a tender offer to shareholders.

BHP's shares closed Tuesday at $70.21, down $1.73, or 2.4%, in trading on the New York Stock Exchange. Wednesday morning in Australia, shares fell 3.7%.

Analysts speculated that mining rivals Vale SA of Brazil, and the Anglo-Australian company Rio Tinto PLC could consider counteroffers. Vale, which not long ago made a $3.8 billion purchase of fertilizer assets, declined to comment. Rio Tinto didn't immediately return a call.

Mr. Doyle of Potash declined to say what might be a suitable offer. People close to the company, based in Saskatoon, Saskatchewan, said an offer would need to factor in Potash's record high of nearly $240 in mid-2008. The offer from BHP was made in a letter Aug. 12 that Potash disclosed on Tuesday.

Looming over any merger negotiations is a national debate in Canada about open markets and foreign takeovers.

Over the past decade, the country has seen most of its big natural-resources companies and many industrial ones taken over by buyers from the U.S., Europe and South America.

The deals included the sales of aluminum and nickel mines to Brazil's Vale and Switzerland's Xtrata, the purchase of Canada's biggest steel producer by U.S. Steel Corp., and the piecemeal sale of struggling tech giant Nortel Networks Corp. to buyers from the U.S. and Europe.

While demand for commodities has fueled Canada's economic growth, there is lingering worry among some that the country is losing its corporate mettle.

In 2009, Canada amended its foreign-takeover code, raising the size of deals that require scrutiny but allowing the government explicit power to veto deals thought to pose a danger to national security.

Prime Minister Stephen Harper said the government would review any transaction but otherwise declined to comment.

As the world's largest mining company, BHP has remained unbowed by a costly and ultimately unsuccessful attempt in 2008 to take over Rio Tinto, its big Anglo-Australian rival.

For BHP's chief executive, South African Marius Kloppers, a play for Potash fits into a broader theme of economic development, particularly in China and India.

BHP offered $130 a share, a 16% premium to Potash's Monday closing price.

"World GDP and GDP development is being driven by...new people entering the modern industrial age...by massive urbanization processes," Mr. Kloppers said in an interview in 2008. This, he said, is "having a huge knock-on effect in demand for our products."

A deal for Potash would represent a shift for BHP, which specializes in minerals and metals and has limited experience with customers who buy fertilizer. Potash is the common name for fertilizer derived from potassium, and includes potassium carbonate and other salts. It is one of the common fertilizers farmers use, along with nitrogen and phosphate.

There are plenty of reasons to expect rising demand for fertilizer. The world is projected to add an average of 57 million people a year between 2000 and 2050, leading to a population of 8.9 billion in 2050, according to United Nations projections. Rising incomes in growing economies will also push up demand for diverse diets, and fertilizer is a sure way to increase food production.

Such long-term global trends have turned Potash Corp. into a high-flying stock that has soared since 2005.

BHP is also counting on China and other rapidly growing nations placing a premium on producing more food, to be independent from foreign suppliers.

Meeting such a basic need is critical, as vividly demonstrated in 2008, when a sharp rise in the cost of food kicked off riots in some parts of the world. This summer's scare over wheat supplies amid a Russian drought provided another reminder.

"It's just a bet that food is going to continue to be precious, and become more precious," said Emerson Nafziger, a professor of agronomy at the University of Illinois at Urbana-Champaign. "It's a bet that the whole world is going to need to replace nutrients in the soil as crops are removed."

China produces only about roughly half as much corn as the U.S. on a given amount of farmland. U.S. farmers generate more than 10 metric tons per hectare (2.47 acres), while China produces just over five and India just over two.

While there are various reasons for such gaps in production, including water and use of genetically modified seeds, fertilizer use is one of the factors.

USDA forecasts released last week show the world will likely consume more grain through next year than farmers are able to produce, which will inevitably shrink the globe's grain reserves again.

World fertilizer demand fell 7% in 2008-09, then rebounded 3.7% in 2009-10 to 162.5 million metric tons, according to the International Fertilizer Industry Association.

It has forecast that demand will rise 4.8% in 2010-2011 and then reach 188.3 million metric tons in 2014-15, amounting to average annual growth 2.5%.

If prices for agricultural commodities rise in years ahead, farmers will have incentives to buy more fertilizer to boost yields, noted Don Roose, president of U.S. Commodities Inc. in West Des Moines, Iowa.