Options traders are boosting wagers that BHP Billiton Ltd. and potential rivals will bid higher than the $40 billion already offered by the world’s biggest mining company for Potash Corp. of Saskatchewan Inc.
Potash Corp., the largest fertilizer producer, rejected BHP’s $130-a-share takeover proposal and said it had held talks with 15 potential alternative bidders. BHP’s offer is subject to a review by the Canadian government, which can block the deal if it finds the transaction doesn’t provide “net benefits” to the country. A decision is due by tomorrow.
The total invested in January $160 calls, 23 percent above BHP’s offer price, has risen to $9 million from $5 million a month ago, while January $165 calls jumped to $6 million from $4 million, according to Capstone Global Markets LLC. Investors also are buying bearish options to protect shares, according to Trade Alert LLC, a provider of options-market analytics.
“Regardless of what happens this week, people think there’s going to be a higher offer from some party, not necessarily BHP,” said Sachin Shah, a special situations and merger arbitrage strategist at Capstone in New York. “People are realizing that the full value is much higher than the $130 that BHP is offering.”
Ruban Yogarajah, a London-based spokesman for BHP, couldn’t immediately be reached for comment. Bill Johnson, a spokesman for Potash Corp., declined to comment.
$130 Won’t Happen
Potash Corp. rose 1.1 percent to $146.63 on the New York Stock Exchange yesterday. The stock has advanced 31 percent since Aug. 16, the day before the company first disclosed BHP’s approach, and has a market value of $43.6 billion. Potash Corp. said last week it held talks with 15 “strategic, financial, and state-sponsored potential bidders or investors,” according to a filing to the Saskatchewan Financial Services Commission.
“They are going to raise it because at $130 a share it’s not going to happen,” Olivia Ker, an analyst at UBS AG in London, said by phone, adding that BHP may increase the offer to $160 to $165 a share. Potash Corp.’s “peers have re-rated by 30 percent, potash prices are up about 35 percent and also BHP’s stock is up,” since the bid was announced, she said.
Potash Corp., based in Saskatoon, Saskatchewan, is seeking to keep in place a so-called poison pill, a defense that’s designed to make a takeover prohibitively expensive, to allow potential bidders time to secure financing. Chief Executive Officer Bill Doyle continues to talk of a fair bid between $170 and $190 a share, UBS said yesterday in a report.
Default Protection Surges
“The evidence is clear that almost all of the alternative bidders or investors require a significant amount of time to secure the unprecedented levels of financing necessary,” Potash said in its filing.
The open interest, or number of existing positions, in Potash Corp.’s January $160 calls has jumped in the past week by almost half to 30,240 contracts, or enough to buy 3 million shares. The largest concentration is in November $145 calls, which total 48,638 contracts. Calls account for 53 percent of the 1.03 million existing options tied to the company’s U.S. shares.
The largest increase in open interest among Potash Corp. options over the past week was in November $135 puts, according to data compiled by Bloomberg. The level more than doubled to 48,184 and now accounts for the second-largest total among all of the contracts. November $140 puts are third with 42,070 options.
“It looks like hedging of long stock positions,” said Henry Schwartz, president of New York-based Trade Alert. “In a deal situation like this where a lot of merger arbitrage funds are involved even the put buying can be a bullish sign because it indicates that fund managers want to stay long until the deal closes.”
Options, Volatility
Calls give the right to buy a security for a certain amount, the strike price, by a set date. Puts convey the right to sell. Investors use options to guard against fluctuations in the price of securities they own, speculate on share-price moves or bet that volatility, or stock swings, will rise or fall.
The cost of protecting BHP bonds from default rose for the second day. Credit-default swaps on BHP jumped 8 basis points to 100.5 basis points as of 4.01 p.m. in Sydney, according to Nomura Holdings Inc. prices. That’s on course for the biggest daily increase since Aug. 18 and the highest level since Oct. 5, prices from data provider CMA show. The swaps rose 6 basis points yesterday, according to CMA. BHP, which obtained $45 billion of loans to back its bid in September, dropped three cents to A$42.27 at the 4:10 p.m. close in Sydney.
Higher Bid
“The market is expecting a slightly higher bid,” Andrew Keen, an analyst at HSBC Holdings Plc, said by telephone. “From a liquidity viewpoint, BHP can bid a lot more and I think that’s pretty widely appreciated.”
Analysts including those at UBS, Citigroup Inc., BMO Capital Markets and Credit Agricole SA raised their price estimates for Potash Corp. last week following the company’s third-quarter earnings, citing rising demand and higher prices for the crop nutrient. Shares of rival fertilizer producers including Agrium Inc. and Mosaic Co. have surged since Potash disclosed BHP’s offer.
Investment Canada, the agency reviewing the bid, has recommended that Prime Minister Stephen Harper’s government approve the takeover with conditions, The National Post reported yesterday, citing unidentified people within the ruling Conservative Party. The Post article is “wrong” to say that Harper will make the final decision, Andrew MacDougall, a spokesman for Harper, wrote in an e-mail message. The decision is made by Industry Minister Tony Clement, he said, adding he didn’t know what recommendation Investment Canada may have made.
Sale ‘Betrayal’
Allowing the sale of Potash Corp. to BHP would be a “betrayal of our province and its people,” the Associated Press cited a statement from the Saskatchewan provincial government as saying in a statement late yesterday.
“The question of value for BHP Billiton shareholders is essential and not negotiable,” Chairman Jac Nasser told investors in London on Oct. 21. “Any acquisition or investment must create value. If shareholder value is not demonstrated, we will not proceed with the proposed acquisition.”
BHP scrapped a hostile $66 billion takeover of rival Rio Tinto Group in 2008 after earlier raising its initial bid in an attempt to win the support of the London-based company.
“They have raised bids before, they raised the Rio bid, so it’s not unusual for them to do that but in the absence of a competitor they have to be very careful,” HSBC’s Keen said. “The problem is you don’t want to end up bidding against yourself.”
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