Commodities & Metals

China Buys Majority Stake in Israeli Agrichemical Company (BHP, POT, MOS, MON, IPI, TNH, CF, CMP)

When BHP Billiton plc (NYSE: BHP) made its $38.6 billion offer to buy Canada’s Potash Corp. of Saskatchewan, China’s Sinochem Group considered making a rival offer for the Canadian fertilizer maker. That offer never materialized, probably because the Chinese government did not back the deal.

That didn’t mean that the Chinese were opposed to any purchases of fertilizer companies, but, perhaps, only gigantic ones. Buying Potash Corp. or another large fertilizer company like Mosaic Co. (NYSE: MOS) or Monsanto Co. (NYSE: MON) would have cost a small fortune and anti-trust considerations would certainly have played a role in such a large acquisition.

China is the world’s largest consumer of food, and it is importing larger quantities all the time. To stem the flow of cash and produce more food for its 1.3 billion people, China has been looking to fertilizer companies. A failed deal for Australia Nufarm Ltd. in 2007 was an early indication of where China was looking.

Now, China National Chemical Corp., or ChemChina as it is known, has announced that it is acquiring a 60% stake in Israeli generic chemical maker Makhteshim-Agan Industries Ltd for about $2.4 billion, an 18% premium on the stock’s closing price yesterday in Tel Aviv. Makhteshim makes generic copies of crop protection products on which patents have expired. The company has plants in Israel, Brazil, Colombia, Spain, and Greece, and owns about 5% of the global crop-protection market.

This deal is a good one for ChemChina and opens up the possibility that the country may be looking for similar acquisitions through others of its agricultural enterprises. We thought it might be interesting to look at a few other US companies that China might acquire for about the same price.

There are many fertilizer companies in India and elsewhere that do not trade on US stock exchanges and that we haven’t considered here. Still, there are three companies that might be worth a second look from Chinese buyers.

Intrepid Potash, Inc. (NYSE: IPI) has a market cap of about $2.7 billion and produces about 1.5% of the world’s potash supply and 8.5% of the US supply. What makes Intrepid a less than optimum acquisition is its stratospheric PE ratio of 79.56. Its forward PE is more than two-thirds lower, but still high at 25.03. The company’s shares posted a new 52-week high of $36.57 just yesterday. In its favor, the company has no long-term debt. This remains a pretty richly valued company given its performance.

Terra Nitrogen Co. L.P. (NYSE: TNH) is a master limited partnership now owned by CF Industries (NYSE: CF). The company has a market cap of $1.96 billion and produces 1.9 million tons annually of urea ammonium nitrates and 1.1 million tons of ammonia. Terra’s PE ratio currently stands at 12.33 and the stock is trading about 10% below its 52-week high. CF Industries just acquired the company earlier this year, and it is unlikely that it would be interested in selling it so soon.

Compass Minerals International Inc. (NYSE: CMP) has a market cap of $2.93 billion, and in addition to potash, the company produces salt, offers off-site secure document storage, and speciality services. The company’s PE ratio is around 19.5 and its forward PE ratio is 15.66. Compass’ shares posted a new 52-week high earlier this month and the shares are up about 30% for the past year. The company is the largest producer of sulfate of potash in the US. The US government could step in if an offer came in for Compass from a foreign buyer.

Each for a different reason, none of these three companies seems like a very likely acquisition target. But the Chinese have made surprising acquisitions before, and could well do so again. And the fertilizer sector is a logical target for a country that needs to increase food production.

Paul Ausick

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