BHP goes hostile on $39 billion Potash Corp bid

MELBOURNE/LONDON (Reuters) - BHP Billiton launched a hostile $39 billion bid for Potash Corp to become the world's top fertilizer maker, and secured a massive loan that could back an expected sweetener.

BHP Billiton, the world's biggest miner, said on Wednesday it was making its $130 a share offer directly to shareholders in the Canadian group, some of whom demanded higher bids of $146-$170 a share.

Bankers told Reuters six banks had agreed to underwrite a syndicated loan of $45 billion to BHP, which is also estimated to have $11 billion in cash, but analysts said the mining group would be wary of overpaying.

BHP's hostile move by-passed Potash Corp's board, which a day earlier called the bid -- this year's biggest takeover offer -- "grossly inadequate" and rolled out a "poison pill" defense.

BHP is likely to have to raise its offer after Potash Corp shares jumped nearly a third in two days, leaving the stock 14 percent above the bid price, analysts said.

"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.

Potash shares in New York had gained 3.1 percent to $147.61 by 1428 GMT, after soaring a record 28 percent on Tuesday.

BHP London shares shed 3.4 percent to 1851 pence, compared with a 1.8 percent fall in the UK mining index, after its Australian shares closed down 4.4 percent.

The cost of insuring BHP debt rose on concerns the miner may be forced to raise its offer to win over shareholders, and after Moody's said it was reviewing the group's credit ratings for a possible downgrade.

Anglo-Australian BHP is looking to capitalize on an expected surge in fertilizer demand from developing countries keen to boost crop yields to help feed rapidly growing populations.

The deal also fits into its strategy of building output in low-cost, exportable commodities, particularly those needed in China, its biggest market.

The sector has consequently attracted heated takeover interest, with BHP's move for Potash Corp following a similar consolidation play in Russia that could result in the formation of a new global No. 2.

In June, Kremlin-backed billionaire Suleiman Kerimov bought more than 50 percent of Russian potash giants Uralkali and Silvinit, and market sources expect the state to support a merger between the two.

BHP SEEKS TO DIVERSIFY

The move for Potash Corp surprised some, as BHP had been expected to focus on its own potash assets, including the Jansen deposit in the Saskatchewan region of Canada, which produces about a third of the world's supply and has huge reserves.

A deal would give BHP a 20 percent share of the global potash market now, rather than wait for its flagship Canadian deposit to hit full capacity in 2021.

"(This deal) further diversifies our footprint by customer, by geography and by commodity," BHP Chief Executive Marius Kloppers said on a conference call. "We are driven by a belief that potash mining has good long-term industry fundamentals."

Potash is the common name for various compounds containing potassium, which are used mainly as fertilizers.

Kloppers denied BHP launched the takeover bid because it had given up on getting regulatory approval for a $116 billion Australian iron ore joint venture with Rio Tinto

"You shouldn't read across, this is just an independent opportunity for us to deploy a fairly substantial chunk of capital," he said.

BHP said it expected the deal to add to earnings in the second full fiscal year after completion and had arranged financing. It put total funds required for the deal at $43 billion, including options and pension obligations.

A fund manager in London, and top-20 shareholder in both BHP and Potash, was disappointed with the bid, noting Potash shares were still well short of their 2008 all-time high, above $241.

"We expect much more. In terms of share price we expect $170 a share," the fund manager said. "For BHP it is a great deal too, it has a lot of cash and can increase shareholder value."

One fund manager at a Japanese institution holding both stocks said a bid at $146 might be successful, but anything higher might spark opposition from BHP shareholders.

"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, adding that BHP may have to offer at least $170 a share to get Potash's board interested.

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

NOT LIKELY TO OVERPAY

Kloppers has a reputation for fiscal prudence, after walking away from a year-long campaign to take over Rio Tinto.

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.

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

"Rio won't have the muscle to outbid Billiton, but financially they are in a much stronger place than they were a year ago. I think it would be a very high-risk strategy when the wounds haven't healed completely on the Alcan deal," said analyst Peter Davey at Ambrian investment bank in London.

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 aluminum company Alcan.

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

BHP is being advised by JPMorgan, TD Securities, Banco Santander, Barclays Capital, BNP Paribas and Royal Bank of Scotland.

Potash Corp is being advised by BofA Merrill Lynch, Goldman Sachs and RBC Capital Markets. The deal could yield potential fees of $170-$190 million to advisers, according to Thomson Reuters data.

(Additional reporting by Julie Crust and Cecilia Valente in London, Michael Erman in New York, Nick Trevethan in Singapore, Sharon Klyne in Sydney, Umesh Desai in Hong Kong, Chikafumi Hodo in Japan; Editing by Jean Yoon and Simon Jessop)