BHP may go hostile after $39 billion Potash Corp bid

MELBOURNE/NEW YORK (Reuters) - Global miner BHP Billiton may go hostile with its $39 billion bid for fertilizer group Potash Corp as early as Wednesday, a source said, setting the stage for a possible higher offer.

BHP Billiton is considering bypassing Potash Corp's board, which has rejected its bid -- the world's largest takeover offer this year -- and submit it directly to the Canadian group's shareholders, said the source familiar with the situation.

The Anglo-Australian miner is looking to capitalize on a resurgence of the global fertilizer industry following a collapse in demand during the global economic slowdown.

BHP, which wants to become the largest fertilizer supplier to a world where survival means more farm production, has hired Mackenzie Partners to solicit shareholders in Potash Corp, the source said.

BHP Billiton declined to comment on Wednesday, saying only that it was reviewing its position after Potash Corp rejected its $130 a share offer, describing it as "grossly inadequate."

BHP shares fell 3.5 percent and the cost of insuring its debt rose on concerns among investors in the Anglo-Australian miner that it would be forced to over-pay for Potash Corp.

"Everyone's saying they'll have to pay more," said Tom Elliott, Managing Director of MM&E Capital based in Melbourne, a hedge fund that takes positions in M&A situations.

BHP Billiton has long been interested in expanding into potash for its next spurt of growth, but investors had expected it to focus on growing its own assets, including the Jansen potash deposit in Canada.

While expecting BHP to raise its bid after the hostile reception from Potash's board, bankers, analysts and investors said BHP was unlikely to face any rival bidders, so the Potash Corp board may find it difficult to push BHP too hard.

"It's a sizable acquisition. There are not too many companies that can do that. There are not too many dance partners Potash can dance with," said Rohan Walsh, investment manager at Karara Capital, which owns shares in BHP. .

Obvious potential contenders, Rio Tinto and Brazil's Vale, were both seen as unlikely to take on BHP in a bidding war.

Rio has only recently sold off potash assets in Argentina and Canada to help pay down a mountain of debt it took on for its ill-timed takeover of Alcan, and it has committed to spend $13 billion on development projects in the next 18 months.

Vale would be more likely to wait to pick up any potash assets BHP might be forced to spin off after taking over Potash, one analyst said.

CAN PAY MORE

With Potash Corp's shares at around $143, BHP may not have to raise its bid too much, analysts said. But not all shareholders were sanguine about the offer.

"We're surprised at the multiple that they're prepared to pay for Potash Corp," said James Bruce, a portfolio manager at Perpetual Investments, which owns BHP shares.

At $130 the bid would be worth 17.1 times forecast earnings for 2011, compared with BHP, trading on a multiple of 11.4, and Potash rival Mosaic Co, on a multiple of 14.8.

"At $130 it would be a great deal. If they get it at $150 it's a decent deal, and it's a strategic deal," said an analyst who declined to be identified.

Potash Corp of Saskatchewan has left the door ajar, saying it might consider a more attractive proposition.

BHP Chief Executive Marius Kloppers has a reputation for not paying too much, after deciding to walk away in 2008 following a year-long campaign to take over Rio Tinto, when the global financial crisis hit.

"The organization (BHP Billiton) has exhibited a very disciplined approach to M&A activity historically. There's no reason it'll change from this point on," said Tim Schroeders, a portfolio manager at Pengana Capital, also a BHP shareholder.

Five-year credit-default swaps on BHP Billiton's debt have widened by 13 basis points since Tuesday and were quoted at 87-90 points, according to a trader at a European bank.

BHP Billiton shares last traded at A$38.75 while Potash Corp shares closed on Tuesday at $143.17, about 10 percent above the current offer.

BHP is being advised by JPMorgan, while PotashCorp is being advised by BofA Merrill Lynch, Goldman Sachs and RBC Capital Markets.

(Additional reporting by Michael Erman in New York; Editing by Lincoln Feast and Jean Yoon)