[miningmx.com] — THE failed takeover attempt of Potash Corporation, a Canadian fertiliser manufacturer, cost BHP Billiton $350m in bid fees, most of which related to arranging the $45bn required to complete the acquisition.
In local currency, those “fees’ total R2.38bn, just a little smaller than the market value of South Africa’s largest private equity company, Brait (R2.9bn). I make the comparison not to suggest Marius Kloppers, CEO of BHP Billiton, wasted a cellar full of money, but rather to give scale to BHP Billiton’s ambitions.
And it’s the group’s scale that is now becoming a quandry for Kloppers since Potash Corp represents the third time the competition authorities had passed the rule over the company’s growth ambitions with disappointing results for BHP Billiton.
In the case of Potash Corp, the Canadian authorities judged the offer was negative for its economy notwithstanding commitments by BHP Billiton to list on the Toronto Stock Exchange and establish a $250m bond for lack of performance on the commitments given. (Incidentally, the minister of industry imposed other undertakings that BHP Billiton considered too costly).
In the diversified mining sector, it’s all about size. Economies of scale, the ability to attract tracker fund investment, securing the best customer lines and market reach all turn on the scale argument, as do mineral resource renewal and growth, the metric on which mining businesses are valued.
In this respect, BHP Billiton is the undoubted gorilla, the silverback of the corporate primates, setting itself down in whatever jungle clearance its hairy backside desires.
The flip side of its dominance, however, is that in order to demonstrate meaningful growth by acquisition, BHP Billiton has to exclusively hunt down tier one businesses. Since these businesses are usually among the largest in their respective sectors, BHP Billiton is finding most targets wreathed in anti-competitive red tape. It asks the question whether BHP Billiton’s failed bid for Potash Corporation now serves official notice it’s too big to grow, at least by acquisition.
The expectation is that BHP Billiton will turn its attention to oil and gas acquisitions in the Gulf of Mexico where it already has a footprint, and where it’s still a minnow. For shareholders today, however, BHP Billiton has become a capital return story because that’s all Kloppers can do with the mountains of spare cash his company is generating.
At its current cash producing capability, BHP Billiton is expected to generate $30bn over the next three years, post dividend payments. $30bn! Already, it announced it will spend $4.2bn in an on-market buy back of its Plc shares (which at the time of writing were trading at a 15% discount to the Ltd stock), effectively resuming the $13bn buy-back it suspended in 2007 when the prospect of buying Rio Tinto came into view.
BHP Billiton’s cash generating ability means other capital management programmes will follow. But I can’t shake the feeling Kloppers is working to Plan B. After all, companies go public to access capital for growth. Had Kloppers considered capital management programmes preferable to the takeover of a fertiliser business, he’d have done so.
Internal expansion is the other obvious growth point for Kloppers, but again there’s a remarkable fact within BHP Billiton’s business that it’s not capital shortages constricting growth but access to people. The business’s growth ambit doesn’t have enough skills to execute it.
One can’t escape the integrity of BHP Billiton’s fundamental investment case: the apparently insatiable demand for commodities, especially in developing markets. But in Potash Corp – producing the mineral that makes arable the land that ultimately feeds the mouths – you could see Kloppers feeling for a crucial differentiator in the same way oil and gas helps set it apart from its peer group.
