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In Pursuit of Potash, BHP Faces Uphill Battle

After Thursday’s strong earnings, shares of Potash are up a bit today, but not as much as they might be if BHP Billiton were not bidding for the company.

That is the strange reality of this special situation. One need look no further than Potash’s investor presentation to see the fact that while its competitors stock prices have moved sharply higher in recent weeks on an expected pickup in demand for their product, Potash has been stuck in the soil.

With perhaps as much as 20 percent of its shares in the hands of risk arbitragers looking for a deal, the fear among potential investors is that BHP raises enough to win over those arbs and carry a shareholder vote, while still not delivering the fundamental value that seems to have risen so dramatically since BHP first made its $130 bid.

All of this may be moot because the company may be searching for a white knight elsewhere.

According to SEC filings, Potash has already talked with 15 strategic buyers to determine whether there is any interest on an alternative deal. This has sent shares of the stock up 2.5 percent mid-day on Friday.

In addition, the Canadian authorities may make the conditions for a deal extremely onerous for the BHP bid—we’ll find out on November 3 when Candian regulatory authorities completes its review of the bid—but if that is the case, it’s far from clear that Potash shares will see a great deal of downside.

Yes, there will be selling by arbs, but there may also be buying by investors who were reluctant to play the name as a play on the price appreciation of its core product.

And if, as is still expected (though the odds have narrowed), Canada allows BHP to proceed unhindered with its bid, the question once again will be what price BHP must pay given Potash’s now more reasonable argument that it is worth $170 a share. Any bid at that price could be a challenge for BHP, which needs to receive shareholder approval were it to make a purchase that exceeds 25 percent of its capitalization.

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