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Sell the Potash/China Rumor

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It does not seem plausible that POT will be sold to a Chinese company.

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Shares of Potash Corp. of Saskatchewan (NYSE:POT), the world's largest producer of its namesake fertilizer, are up about 1.4% Thursday on volume that has already eclipsed the daily average on speculation the company could be a takeover target for a Chinese company.

All traders need to do is review some recent history to realize this is setting up as the ideal "buy the rumor/sell the reality" trade. In 2010, BHP Billiton (NYSE:BHP), the world's largest mining company, made a hostile $38.6 billion offer for Potash that would ultimately be scrapped because the Canadian government did not want the company falling into foreign hands.

BHP is based in Australia. In theory, it should be easier for an Australian, British, or US firm to acquire a Canadian rival than it is for a Chinese company to do the same. Even if that was not the case, it still does not seem too plausible that A) Potash is even for sale and B) That if it is, it will fall into Chinese hands. Here is why.

BHP offered $38.6 billion for Potash two years ago. Even though the shares have fallen since then, Potash's current market cap is almost $38 billion. The company can be considered a mining/materials play and for all deals in that sector valued at $5 billion or more since 1999, the average takeover premium has been 30%, according to Bloomberg.

Say Potash has a market cap of $38 billion and that means $49.4 billion is 30% above that. That significantly lowers the pool of potential suitors. In 2010, the company Beijing deemed as its preferred acquirer of Potash was Sinochem International, China's largest chemicals trader. Sinochem's problem was that it needed to finance the deal on its own and could not. Ultimately, the company made no credible offer for Potash.

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No positions in stocks mentioned.

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