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If you follow the financial markets in any shape or form, it has been near impossible to miss the vast amount of merger and acquisition activity taking place under the current global circumstances.
Most of the action taking place in the materials and commodities space, however acquisition opportunities are arising across nearly every sector and on an international stage. One of the closest watched here in Australia has been BHP’s hostile bid for Canada’s Potash Corporation of Saskatchewan. The $40 billion bid was knocked back almost immediately, dismissed as ‘grossly undervalued’; clearly it was received as an insult by the world’s largest potash producer. The reaction of the greater market was one of disapproval to BHP’s bold move. A reaction I believe to be perhaps a little short-sighted.
Understandably, for the world’s largest miner to be undertaking an attempted purchase of such bold proportions, concerns from analysts and investors are warranted. After all, the purchase represents nearly one-third of BHP’s total market capitalisation and will significantly change BHP’s current squeaky-clean debt position.
I ask you to consider a different view: BHP didn’t go from being another mid-sized Australian miner in the 90’s to the world’s most dominant mining force across a number of industries by sitting on their hands. They achieved world mining dominance through a number of strategic acquisitions, a diligent management team and diversification into key areas of global demand. The latest acquisition attempt appears no different, except perhaps in its scale.
Potash is used in the production of fertilizer. The Potash industry is largely dominated by one major player, The Potash Corporation of Saskatchewan, and the industry is expected to grow significantly in years to come. What many people don’t know is BHP has been attempting to make inroads into the industry for quite some time, starting with a much smaller acquisition of Canadian Potash producer Athabasca Potash in January.
Why would the world’s largest miner want a piece of the Potash pie so badly?
The answer is demand. Demand for food, demand for fertilizer and demand to grow more crops on less land mass, in less favourable conditions. The world population is growing at a steady pace. Developing economies such as China and India are expanding at a rapid pace and with this increased growth, the demand for resources will also increase. By having a stronghold on the Potash industry, BHP has one more offering to compliment their already extensive plethora of resources required by the developing world.
Add to this, several other factors which further compliment a potential acquisition:
- Companies are trading at a significant discount to where they were prior to the GFC
- The cost of borrowing is as cheap as ever with interest rates in many countries remaining at record low levels.
- BHP has the capital to make the purchase and they can still maintain dividends to shareholders through doing so.
- Balance sheets have been trimmed, costs have been managed and companies are holding record amounts of cash.
- The overall market still has an extremely short term view of the future. Bargains are plentiful, particularly in cyclical industries.
All of the above reasons outline exactly why BHP would be so keen to make a strategic acquisition. Particularly an acquisition which the market may look at in retrospective and applaud.
A pessimistic short-term view of global markets may be clouding the largest acquisition to be seen from an Australian company in 2010. BHP hasn’t grown to such heights by taking a short-term view of the future and they certainly won’t maintain their position without strategic acquisitions and diversification on a global stage. If you don’t own BHP, then maybe this recent pull-back is the time to get on board.
Fundamental growth is key to the overall success of any long-term stock selection. Whilst past performance only provides half the story, those with ValueGain can conduct further analysis on BHP by clicking the ‘ratio analysis’ tab.
Happy Investing
Lachlan McPherson
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