Surge In Grain Prices May Force BHP’s Hand

Surging world grain markets may force BHP Billiton to raise its $130-a-share offer for PotashCorp by 25 per cent or more as a subsequent jump in fertilizer shares wiped out its initial bid’s premium to investors.

The burst in grain prices late last week may herald a fresh round of food inflation that won’t disappear any time soon, analysts say, underscoring the rationale behind BHP’s $39-billion gambit for Canada’s PotashCorp.

The world’s largest fertilizer supplier has become an attractive takeover target because it’s the leading producer of an agricultural input that’s crucial to feeding a burgeoning world population.

At the same time, the Anglo-American miner’s initial bid, flatly rejected by PotashCorp, has become even less attractive to investors as the surge in grain prices has boosted shares of North America’s top fertilizer producers.

As a consequence, Gleacher &Co. analyst Edlain Rodriguez believes BHP may have little choice but to raise its bid, even if a rival proposal doesn’t surface.

“The fundamentals have improved significantly, with corn and everything else moving – that’s like a game changer,” said Rodriguez. “As a result, I think it is very likely that BHP has to raise that number quite a bit. I think somewhere around $160 is the right number for PotashCorp.”

The trigger that may lead BHP to recalculate was an Oct. 15 reduction in the U. S. Agriculture Department’s estimate of this season’s corn crop. That in turn pushed the prices of corn, wheat and soybeans up to the maximum amount allowed in a day on the Chicago Board of Trade.

Rodriguez argues that if BHP were to walk away, PotashCorp’s shares might fall five or 10 per cent, but the stock would soon rebound given the recent strengthening in grain prices.

Shares of PotashCorp’s North American rivals – Mosaic Co., Agrium Inc. and CF Industries – have risen 11 per cent, 13 per cent and 17 per cent, respectively, since the release of the crop data Oct. 15.

Shares of all three companies have risen between 35 to 43 per cent over the last three months, while corn prices have gradually risen roughly 50 per cent over the same period to more than $5.50 a bushel.

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