BHP’s bid provokes poisonous reply

 
David Hellier
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JUST as the markets were drifting into the final few days of summer - traditionally one of the quietest times of the year for corporate news – up pops mining giant BHP Billiton with a near $40bn proposal to takeover the Canadian fertiliser and animal feed group Potash.

Although all sorts of things are possible in these kinds of situations, it is fair to say that since a meeting between their top executives last week relations between the two groups have been far from cordial.

BHP is talking about offering $130 a share for Potash stock, a value that has been described as grossly inadequate by the Potash board.

But to make matters even more acrimonious Potash yesterday revealed details of a shareholder rights plan that is automatically triggered when a hostile bidder buys up 20 per cent of its stock.

Such schemes, commonly known as poison pills, are not allowed in the UK – one such scheme might have helped Cadbury’s Roger Carr when he got the knock on the door from Kraft. The so-called Potash shareholder rights plan, which seems designed as much to help management keep their jobs as it does to protect shareholders, would have the effect of diluting a hostile bidder’s stake and is designed to force a bidder to pay a premium price.

At this stage BHP has not said where it goes from here. It has the financing in place to fund the deal through bank debt and analysts such as Charles Kernot at Evolution Securities will cheer the group along if it can bag this one at the right price. But the early signs are that Potash will be fighting hard to get a higher price and, as ever with these deals, BHP must be careful not to overpay. As broker CLSA says: “this is just the start of a long battle.”

SPLIT BANK

Whatever the minutes from the last Bank of England meeting say today, there is every reason to think it is becoming harder to produce unanimity amongst Bank members.

For months and months as the economy struggled to find a way out of recession, there was little doubt that interest rates had to be held low and there was a need for some loosening of monetary policy through the method known as quantitative easing.

But last month’s record increase in food prices has kept inflation above three per cent and sparked warnings that the cost of living will keep rising, provoking concern amongst Bank members about the threat of inflation. This threat is intensified by the imminent rise in VAT which will feed through into the system in 2011.

Yesterday Bank governor Mervyn King wrote another letter explaining why the inflation rate was outside the target agreed with the government.

King’s view is that the recent inflation blip may last for a while but that it is not being embedded in the system.

Bank Monetary Policy Committee member Andrew Sentance is more anxious and has in the past voted for a rise in interest rates.

Others are more troubled by fears that the recovery might run out of steam, especially when the public sector job cuts start to come into effect.

Many think they know the answer but in truth I am not surprised that the Bank is split and I can only see the splits becoming more pronounced in the months ahead.

david.hellier@cityam.com

Allister Heath is away