Saturday 21 October 2017

Marius Kloppers, BHP Billiton chief executive

Vegetarian South African under pressure in carnivorous corporate culture of bidding

THE lukewarm market reaction to BHP Billiton's $40bn (€31.4bn) hostile takeover for PotashCorp of Canada piles the pressure on chief executive Marius Kloppers.

Having already tried and failed to acquire Rio Tinto, he can't afford a second unsuccessful takeover. As hostile takeover bids go, they don't come much bigger than this. On Thursday, BHP Billiton, the Australian mining giant, announced that it was prepared to pay $39m in cash (€30.5bn) to acquire PotashCorp. Based in Saskatchewan, Canada, PotashCorp is the world's largest fertiliser company.

PotashCorp's main product is potash, which is used in most fertilisers. It controls almost a quarter of the world's potash reserves. Potash prices have been extremely volatile in recent years. They peaked at over $1,000 (€781) a tonne during the 2007-'08 commodity price boom and have since fallen back to about $350 (€273), still well above the long-term historical average of about $150 (€117) per tonne.

Unlike most minerals, potash is highly concentrated geographically, with just three countries, Canada, Russia and Belarus controlling three-quarters of the world's reserves. As rising global prosperity increases the demand for food while the supply of suitable agricultural land remains finite, there is going to be a much greater need for potash in the coming years.

Consumption

PotashCorp itself estimates that Chinese potash consumption will rise from 10 million today to 30 million tonnes by 2020, while Indian consumption is forecast to rise from six million tonnes to 15 million tonnes over the same period.

And the growth in potash consumption is unlikely to stop there. The UN predicts that, with the world population set to rise from 6.9 billion today to 9 billion in 2050, global food production will have to double by mid-century. That's going to require lots more potash.

It is this combination of concentrated reserves and rising demand that has attracted BHP Billiton. After failing to win the support of the PotashCorp board for its offer, it went over the directors heads this week and appealed directly to the company's shareholders. According to BHP Billiton, its all-cash bid of $130 (€101) per PotashCorp share, which represents a 20pc premium on the share price immediately before the announcement of the offer, represents a "compelling offer" for PotashCorp shareholders. PotashCorp was having none of it with chairman Dallas Howe declaring that: "We believe it is critical for our shareholders to be aware of this aggressive attempt to acquire their company for significantly less than its intrinsic value.

"The fertiliser industry is emerging from the recent global economic downturn, and we feel strongly that PotashCorp shareholders should benefit from the current and potential value of the company. We believe the BHP Billiton proposal is an opportunistic effort to transfer that value to its own shareholders."

The decision of the PotashCorp board to come out fighting means that BHP Billiton will almost certainly have to increase its price if the bid is to succeed. Some analysts have argued that PotashCorp could be worth up to $180 (€140) a share. At that price, BHP Billiton would end up paying more than $55bn (€43bn) for PotashCorp.

Financial capacity

BHP Billiton certainly has the financial capacity to pay substantially more PotashCorp.

Not alone has it got $11bn (€8.6bn) of cash on its balance sheet, it has also borrowed $45bn (€35bn) from a consortium of banks to help fund the bid. Quite clearly, money isn't a problem.

What could be a problem is BHP Billiton's own shareholders. A number of its shareholders have already expressed fears that it risks overpaying for PotashCorp while ratings agency Fitch announced that, following the news of the offer, it was putting BHP Billiton's credit rating under review with a view to a possible downgrade while fellow rating agency Standard & Poors stated that it was putting the company's rating on "credit watch". However, any cut in BHP Billiton's credit rating is likely to be minimal.

All of which is good news for BHP Billiton's South African-born chief executive Marius Kloppers. He was barely a wet day in the job when, in November 2007, he launched a hostile $66bn (€51.5bn) takeover bid for Anglo-Australian mining giant Rio Tinto. A year later, after spending $450m (€351m) on professional fees and other costs, BHP Billiton was forced to abandon its bid.

Kloppers can't afford another humiliation like the botched Rio Tinto takeover. The Australian corporate culture is a carnivorous one -- although Kloppers himself is a vegetarian. Even well-regarded chief executives such as Kloppers are lucky to get a second chance. Third chances are unheard of.

A native of Cape Town, Kloppers will be 48 next week. After completing his national service in the apartheid-era South African Army, during which he fought against the communist-supported Angolan government, he graduated from the University of Pretoria with a degree in chemical engineering. He then went on to successfully study for a PhD in materials science at the Massachusetts Institute of Technology before acquiring that essential accoutrement of the high-flying modern executive, the MBA, from the Paris-based INSEAD business school.

Kloppers spent the early years of his career in South Africa with synthetic fuel company SASOL and mining research laboratory Mintek before joining international consultants McKinsey in 1992. After a year with McKinsey, he was hired by the South African mining company Billiton to run an aluminium smelter in South Africa.

His big break came in 2001 when Billiton merged with the much larger Australian company BHP to form BHP Billiton. The merger added Billiton's aluminium and titanium interests to BHP's existing iron ore and copper businesses to create the world's largest mining company.

Although the transaction was technically a merger with the new company being headquartered in Australia, it was the former Billiton management who came out on top in the inevitable post-merger jockeying for position. This process culminated with Kloppers' appointment as chief executive in May 2007, beating the fancied candidate Chris Lynch, who came from the BHP side of the group.

The effective takeover of BHP Billiton by the largely South African ex-Billiton executives led by Kloppers has been a source of considerable acrimony in Australia's financial capital Melbourne. It is also widely believed in Australian financial circles that BHP overpaid for Billiton by as much as $5bn (€3.9bn).

Almost a decade later, that's all water under the bridge. However, the success of the Billiton executives led by Kloppers in seizing control of the merged group is a testament to his tenacity. He is going to need all of that tenacity if he is going to overcome the resistance of the PotashCorp board to his takeover.

A successful takeover of PotashCorp would add a third earnings stream to BHP Billiton's existing ferrous and non-ferrous metals businesses. With the supply of potash restricted and demand rising, PotashCorp would allow BHP Billiton to corner a potentially lucrative market.

That's something worth paying for. With its cash balances and the banking facilities already in place Kloppers can well afford to increase his offer. After a suitable period of huffing and puffing, expect him to do just that. Unless a rival bidder agrees to pay a totally excessive price, BHP Billiton will end up paying more, possibly much more, for PotashCorp.

Irish Independent

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