Potash Corp. of Saskatchewan Inc., the world's largest fertilizer producer, rejected an unsolicited $39 billion takeover proposal from BHP Billiton Ltd. as too low, prompting speculation of a higher bid.

Potash Corp.'s board turned down the offer of $130 a share in cash, saying it "unanimously believes that the BHP Billiton proposal substantially undervalues Potash Corp. and fails to reflect both the value of our premier position in a strategically vital industry and our unparalleled future growth prospects," Chairman Dallas Howe said today in a statement.

Potash Corp., based in Saskatoon, Saskatchewan, produces fertilizer, industrial and animal feed products. Consolidation in the fertilizer industry is increasing as the population grows, boosting the need for food. The global population will swell to 9.1 billion in 2050 from 6.8 billion, the United Nations' Food and Agriculture Organization said in September.

"What is clear from this is that the potash industry is going to be consolidated by the mining industry," Paul Cliff, an analyst at Nomura Holdings Inc. in London, said today by phone. "And that may happen a lot quicker than most people thought." Cliff has a "reduce" rating on BHP stock.

Rivals Gain
Potash rose $37.85, or 25 percent, to $140 as of 6:51 a.m. in pre-market trading on the New York Stock Exchange. The company has a market value of $33.3 billion, based on yesterday's closing price. Competitors Intrepid Potash Inc. and Mosaic Co. also advanced in pre-market trade. Yara International ASA, the largest publicly traded nitrogen-fertilizer maker, jumped 4.8 percent to 251.4 kroner in Oslo.

BHP dropped 1.4 percent to 1,934.5 pence in London. Illtud Harri, a spokesman for Melbourne-based BHP, declined to comment on Potash Corp.'s statement.

Rising demand for potash, especially after the U.S. forecast a decline in wheat output because of adverse weather in Russia, Ukraine and Kazakhstan, is also driving acquisitions elsewhere. Last week OAO PhosAgro, the world's second-largest maker of phosphate fertilizer, said it's seeking a merger with Russian potash producer OAO Silvinit. Troika Dialog said Aug. 16 that Silvinit may merge with Russia's OAO Uralkali.

BHP Chief Executive Officer Marius Kloppers said last August that his company would spend "billions of dollars" to develop its Jansen potash project in Canada, which is near Potash Corp.'s mines.

Eoin Treacy's view BHP Billiton has made no secret of the fact that it wants to leverage its balance sheet through acquisitions of world class resources. Potash Corp of Saskatchewan, as the largest company in an oligopoly focused on the potash fertilizer sector, represents just such a target. (Also see Comment of the Day on June 10th).

C$130 marked the upper side of the 18-month range and is just over half the 2008 peak value near C$246 so it seems a low offer for such a prime set of assets. BHP can't seriously have expected to succeed at that level which would suggest that this is simply the opening salvo in what could be a relatively lengthy process.

The Globe and Mail quoted Potash Corp CEO Bill Doyle as saying "I am not saying we are opposed to a sale, but I am saying we are opposed to a steal of the company," which suggests that the company will not aggressively combat a fairer offer.

Just how the Canadian government regard this potential takeover is a wild card. They may think twice about allowing another one prime national asset to slip out of Canadian control having already allowed Falconbridge and Inco to fall into foreign ownership, they could potentially allow Potash Corp to go the same way but it is hard to see how that would be in the national interest beyond the short-term reward. While the merger is certainly in BHP's interests, I cannot see how the same can be said of Canada.

In any case, the news of this offer, Agrium's bid for Australian AWB and the potential partnership between Uralkali, Silvinit and Belaruskali indicates that more aggressive consolidation of the sector is underway

Potash Corp soared to C$144 today and in the process broke out of the 18-month range. This is the 7th consecutive week to the upside for Agrium and it is now testing the March highs near C$75. Some consolidation of recent gains looks likely but a sustained move back below C$60 would be required to question medium-term upside potential. Yara International has underperformed somewhat but has a relatively similar pattern. Mosaic, Incitec Pivot, K+S, Western Potash and Intrepid Potash could all benefit from increased merger speculation.