Canada's PotashCorp Mounts New Bid for Israel Chemicals

Israel Corporation could post a huge $6.1 billion gain, but the odds are slim that authorities will countenance a takeover.

Canada's Potash Corporation of Saskatchewan (PotashCorp ), the Western world's largest producer of potash, has begun renewed efforts to acquire control of Israel Chemicals.

The latest effort came to light yesterday when news leaked that PotashCorp CEO Bill Doyle had recently met with Prime Minister Benjamin Netanyahu to lobby for the deal. Amir Elstein, chairman of The Israel Corporation, which controls 52.3% of ICL, was present at the meeting. Both companies subsequently confirmed the reports.

If it were to go through, the merger of the two chemical companies could yield a giant capital gain of at least $6.1 billion, or some NIS 23.8 billion, for The Israel Corporation.

On the Tel Aviv Stock Exchange, investors celebrated the news, lifting ICL's share price 5.2% at close to NIS 48.60, although off by more than a shekel from its peak of NIS 49.35 during trading. The market assumes that PotashCorp will pay a premium over ICL's undervalued TASE share price for the privilege of gaining control of the company.

In New York, shares of PotashCorp had edged up just 0.3% to $40.26 by noon New York time.

The Canadian company, which already owns 13.9% of ICL, has never hidden its intentions to take over the company. But Israeli authorities have not allowed PotashCorp to increase its stake to 25% as it had sought in the past. Thus, said analysts, yesterday they are doubtful it would win approval to take control of ICL.

"Ultimately I estimate that the odds of the deal going through are lower than the chances it will be approved," said Gil Bashan, analyst at IBI Israel Brokerage & Investments. "There are a series of obstacles that it will have to clear along the way. It has no approval from regulators here, and I assume that regulators in Europe and the United States will need to clear a merger."

PotashCorp said yesterday that the merger was far from a done deal. "No deal has been formulated; there is no assurance that a deal will be reached, or that parties will sign an agreement," it said in a statement, declining to add further details.

The proposed deal would involve ICL merging into PotashCorp via a share swap. The Canadian company trades on the New York Stock Exchange at a $34.7 billion market capitalization while ICL trades on the TASE at $15.2 billion, so ICL shareholders could end up holding 30% of the merged company. About half of that, 15%, would be allocated to the Ofer family's Israel Corporation, making it the Canadian company's largest shareholder.

ICL shareholders, however, could end up with an even larger stake in the combined company. PotashCorp would likely be asked to pay a premium over the current market price of ICL, which generally trades at a lower price/earnings ratio than its global competitors.

Already last December, PotashCorp had asked Israel's Government Corporations Authority to raise its stake in ICL beyond the 14% threshold.

The GCA's approval is necessary since the government received a "golden share" in ICL when the company was floated on the stock exchange in 1992. The golden share, meant to protect the state's interest in natural resources from the Dead Sea, confers veto rights over anyone accumulating more than 14% of ICL's shares. Acquiring shares in excess of 25% of the total likewise requires GCA approval.

In June, PotashCorp backed down from its bid to increase its ICL stake after Israel's antitrust authority expressed reservations, fearing such a move would exacerbate concentration in the local potash market and have an adverse effect on competition.

ICL sells 400,000 tons of potash annually to the local market, including 300,000 tons to Haifa Chemicals, which has been embroiled in a dispute with ICL over prices.

Approval from the antitrust authority could again become a stumbling block on the road to PotashCorp taking over ICL. Public outcry over private businesses gaining control of the country's natural resources - ICL has the rights to the trove of Dead Sea minerals - and the feeling of these being sold off by the government for a pittance and the enrichment of a small circle, could pose at least as large a hurdle.

"We saw, for example, in the Makhteshim-ChinaChem merger that it took a lot of time for the authorities in Europe to approve the process," noted Bashan. So far the state's [Israel] failure to approve PotashCorp's raising its 14% stake to 25% and taking control is two steps forward on this. It means, I think, the odds are not good."

A merger with PotashCorp would free Idan Ofer, who controls Israel Corporation, from intense public pressure and provide him with a relatively easy way to realize the most profitable investment of his career. ICL is Israel Corporation's greatest dividends generator, paying out some $6 billion since the beginning of 1999, when Israel Corporation gained control of the formerly state-owned company.

The half that has gone to Israel Corporation has helped prop up losing investments like Zim International Shipping Lines, TowerJazz and Better Place.

Shlomi Shuv, deputy dean (accounting ) of the Arison School of Business, Interdisciplinary Center in Herzliya, estimates that Israel Corporation could post a $6.1 billion capital gain, based on the fact that its shares in ICL are now worth $7.8 billion while their value on its balance sheet is a mere $1.7 billion.