Options traders tip BHP to enhance Potash offer

Options traders are boosting wagers that BHP Billiton and potential rivals will bid higher than the US$40 billion ($52.3 billion) already offered by the world's biggest mining company for Potash of Saskatchewan.

Potash, the largest fertiliser producer, rejected BHP's US$130-a-share takeover proposal and said it had held talks with 15 potential alternative bidders. BHP's offer is subject to a review by the Canadian government, which can block the deal if it finds there are no "net benefits" to the country. A decision is due today.

The total invested in January US$160 calls, 23 per cent above BHP's offer price, has risen to US$9 million from US$5 million a month ago, while January US$165 calls jumped to US$6 million from US$4 million, according to Capstone Global Markets.

Investors also are buying bearish options to protect shares, according to Trade Alert, a provider of options-market analytics.

"Regardless of what happens this week, people think there's going to be a higher offer from some party, not necessarily BHP," said Sachin Shah, a special situations and merger arbitrage strategist at Capstone in New York.

"People are realising that the full value is much higher than the US$130 that BHP is offering."

Ruban Yogarajah, a London-based spokesman for BHP, could not immediately be reached for comment. Bill Johnson, a spokesman for Potash, declined to comment.

Potash said last week it held talks with 15 "strategic, financial, and state-sponsored potential bidders or investors," according to a filing to the Saskatchewan Financial Services Commission.

"They are going to raise it because at US$130 a share it's not going to happen," said Olivia Ker, an analyst at UBS in London. She said BHP may up the offer to US$160 to US$165 a share.

Potash's "peers have re-rated by 30 per cent, potash prices are up about 35 per cent and also BHP's stock is up," since the bid was announced, she said.

Potash, based in Saskatoon, Saskatchewan, is seeking to keep in place a so-called poison pill, a defence that's designed to make a takeover prohibitively expensive, to allow potential bidders time to secure financing. Chief executive Bill Doyle continues to talk of a fair bid between $170 and $190 a share, UBS said yesterday in a report.

"The evidence is clear that almost all of the alternative bidders or investors require a significant amount of time to secure the unprecedented levels of financing necessary," Potash said in its filing.

The open interest, or number of existing positions, in Potash's January US$160 calls has jumped in the past week by almost half to 30,240 contracts, or enough to buy three million shares. The largest concentration is in November US$145 calls, which total 48,638 contracts.

Calls give the right to buy a security for a certain amount, the strike price, by a set date. Puts represent the right to sell. Investors use options to guard against fluctuations in the price of securities they own, speculate on share-price moves or bet that volatility will rise or fall.

- BLOOMBERG