By Sonali Paul and Michael Erman
MELBOURNE/NEW YORK (Reuters) - Global miner BHP Billiton may go hostile with its $38.6 billion bid for fertilizer group Potash Corp as early as Wednesday, a source said, as investors braced for a possible bid battle.
BHP Billiton, which wants to become the largest fertilizer supplier to a world where survival means more farm production, is considering bypassing the Potash Corp board, which has rejected its offer, and submit it directly to the Canadian group's shareholders, said the source familiar with the situation.
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 Billiton 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 in what is already the world's largest takeover offer this year.
"Everyone's saying they'll have to pay more," said Tom Elliott, Managing Director of MM&E Capital, a hedge fund that takes positions in M&A situations.
"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.
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.
BHP Billiton investors in Australia said that they expected the company to raise its offer, but were still calculating how much it could afford to pay.
Potash Corp of Saskatchewan has left the door ajar, saying it might consider a more attractive proposition.
There is some speculation that other bidders could enter the fray, but one investor said rival miners like Brazil's Vale and Rio Tinto would be hard-pressed to bid against deep-pocketed BHP Billiton.
"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.
Rohan Walsh, investment manager at Karara Capital, another BHP shareholder, agreed.
"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," Walsh said.
Five-year credit-default swaps on BHP Billiton's debt have widened by 13 basis points wider since Tuesday and were quoted at 87-90 points, according to a trader at a European bank.
BHP Billiton shares last traded down 3.5 percent at A$38.78 while Potash Corp shares closed on Tuesday at $143.17, well 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.
(Reporting by Megan Davies and Michael Erman in New York and Sonali Paul in Melbourne)
