Why Potash Corporation Withdrew Its Proposal to Acquire K+S
(Continued from Prior Part)
Valuation multiples
To compare fertilizer companies like Potash Corporation (POT), K+S Potash, Mosaic (MOS), and CF Industries (CF), we’ll use the PE (price-to-earnings) multiple, as these companies have a stable history of earnings per share.
Effect on Potash Corporation
When Potash Corporation (POT) announced its intention to acquire K+S, Potash Corporation’s price dropped. Since then, the company’s PE ratio has been declining, particularly as a result of weakness in outlook. This has impacted most of the companies in this sector, as the above graph shows. Potash Corporation is currently trading at 10.8x, which is at the lower end of the historical range of 10.8x to 21x.
As a result of the withdrawal of the K+S proposal, there may be a rally in Potash Corporation shares, which were at a premium. This is because Potash Corporation investors no longer have to discount for the premium paid to K+S investors. Currently, Potash Corporation (POT) and Agrium (AGU) form about 8% of the Market Vectors Agribusiness ETF (MOO).
Effect on K+S
The withdrawal of this deal had the opposite effect on K+S share price. K+S dropped 24% after the announcement of Potash Corporation’s decision. The drop in stock price has also driven down the company’s valuation multiple. Currently, K+S is trading at a PE of 13x. Historically, K+S has traded anywhere between 11x and 31x, so the company is trading close to its historical range.
The average PE of the peer group in the chart above is 10.8x, with Mosaic (MOS) trading at a PE of 9.6x and CF Industries (CF) trading at a PE of 9.7x.
To get more updates about fertilizer companies, please take a look at our Agricultural Fertilizers page.
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