Protecting Potash From Itself

By Eric Jackson
RealMoney Contributor
11/15/2010 5:00 PM EST
Click here for more stories by Eric Jackson

BHP Billiton (BHP - commentary - Trade Now) pulled its offer for Potash (POT - commentary - Trade Now) yesterday afternoon and said it would spend $4 billion on stock buybacks. Investors, however, still believe a deal is possible. Shares of Potash dipped less than 2% to $137 on yesterday's news. The stock was trading at $111 prior to the buyout offer in August.

BHP certainly still has a lot of dry powder -- even after its commitment to spend $4 billion on buybacks at some unspecified. That's just 10% of the amount that the company was prepared to spend on its acquisition of Potash.

There are many merger arbitrage hedge funds still betting that a deal will go through. However, based on the Canadian government's rejection of the proposed deal a few weeks ago, I'm not so sure it will happen.

Many were surprised by this decision. Countless articles have pointed out that this was only the second time since the 1980s that the Canadian government has ruled out a proposed deal. However, there's been little analysis into why the deal was ruled out and what it might mean for future deals.

Industry Canada -- the Canadian equivalent of the Federal Trade Commission (FTC) -- has to sign off on any foreign buyout of a Canadian company. The organization actually green-lighted the BHP deal. It was the Minister of Industry, Tony Clement, who blocked the deal -- and it came down to politics.

The federal Conservatives have led the country -- fairly well when you consider Canada's position today relative to the rest of the world -- as a minority government for the last four years. They are widely expected to call another election in the next six months.

It became clear weeks ago that many Western Canadian business leaders weren't behind the BHP takeover. They basically didn't like the future it presented to many of them -- most of whom lead energy or agricultural companies that potentially could be attractive buyout candidates in the future. They have seen dozens of acquisitions of mid- to large-sized Canadian companies out over the last 15 years, and they have seen those companies basically become branch plants or branch resource locations (where key executives remain abroad and local Canadian jobs are lost). What's more, the key resources fall under the control of some foreign company.

...

[*** This post is an excerpt of the full article, available by clicking here to go to RealMoney.com. Note: subscription required. ***]

Sphere: Related Content

China Trip: China Agritech

By Eric Jackson
RealMoney Contributor
3/29/2010 11:00 AM EDT
Click here for more stories by Eric Jackson

Friday, I met with Steven Zhu, COO of fast-rising stock China Agritech (CAGC - commentary - Trade Now), a maker of organic fertilizers. The stock has been on a tear since last fall, rising from $4 in September to $27.36 last Friday. The company will be announcing its Q4 and full-year earnings this week. And while I walked away from the meeting feeling that this is a solid company, I would avoid holding the stock this week and wait to enter at a lower price.

Fertilizer companies around the globe have been on fire over the past half-year. Agrium(AGU - commentary - Trade Now) has been in a bidding war for CF Industries (CF -commentary - Trade Now), which was making a play -- and did so successfully -- for Terra(TRA - commentary - Trade Now). Agrium is up 45% in the past six months, while Terra is up 30%. Potash Corp (POT - commentary - Trade Now), another large integrated fertilizer company, is up 35% in the same period. In growing economies, these fertilizer companies have had a price advantage, selling to farmers looking to increase the yield of their arable land and maximize what they can sell to hungry and growing populations.

In China, these macro trends have been even more pronounced. The world's most populous country, with almost 1.5 billion people, has been experiencing a mini-boom, increasing demand for food. At the same time, arable land in China is scarce. With the larger cities continuing to increase in size and smaller conurbations growing to house the expanding population, farmers have had to make the most of the arable land available. China's annual fertilizer output reached 67 million tonnes last year, up 16% from the prior year. Most Chinese farmers are simple and are looking to buy the cheapest fertilizer possible to maximize their land's production.

Within the Chinese fertilizer space, organic fertilizers -- which China Agritech manufactures, along with competitors likeChina Green Agriculture (CGA - commentary- Trade Now) -- are a still a small segment, accounting for only 10% of the market. Such fertilizers increase yield while protecting the long-term health of the land compared with traditional fertilizers. They're more expensive, so they require a more sophisticated sales force to explain to farmers how they will be better off in the long run by using these fertilizers, even though they will cost more initially.

....

[This post is an excerpt of the full article, available by clicking here to go to RealMoney.com. Note: subscription required.]

Sphere: Related Content

Not All Ag Names Are Created Equal

This morning, we got some disappointing news about slowing sales at Caterpillar (CAT). There's been a softening of orders in new machinery/equipment tied to global infrastructure and agriculture, which has led the company to slash costs and forecasts.

Earlier this month, we heard a similar story from Deere (DE), which has seen orders for agricultural equipment drop sharply.

You might be tempted to conclude that weak orders for agricultural machinery equates to a weak outlook for "ag" as an industry. It doesn't. You just need to pick your spots.

My checks of farmer demand indicate that, while uncertainty about the global economy remains a concern, farmers still need to grow their crops. To get the most from their crops, demand for nutrients, chemicals and fertilizer remains very high. Suppliers I've checked in with are very happy about orders for the coming season.

My two favorite nutrient/fertilizer plays here are Potash (POT) and Agrium (AGU) -- with trailing enterprise-value-to-EBITDA ratios of under 6 times and 4 times respectively. Both should see their stocks rise over the summer as results come in.

I also mentioned AgFeed (FEED) last week, a favorite Chinese small-cap of mine, selling pork in that market -- it's up about 20% since my mention last Thursday.

Ag makes sense. You just have to realize that not all in the space are created equal at this stage in the cycle.

Originally published in RealMoney.com on 4/21/2009 11:29 AM EDT

Sphere: Related Content