Analysis - Potash shake-up puts K+S quest for partner in doubt

FRANKFURT (Reuters) - K+S SDFG.DE Chief Executive Norbert Steiner's uphill struggle to expand the world's third-largest potash supplier could be about to get even harder.

Lacking the financial clout to buy a larger rival, Steiner is looking for overseas partners for new mines to dig for potash, a key crop nutrient, which at current prices some analysts estimate would only just be viable.

If BHP Billiton (BLT.L) (BHP.AX), the world's largest miner, wins its $39 billion (25 billion pounds) hostile takeover of industry leader Potash Corp (POT.TO) global potash prices could fall, making greenfield ventures even more doubtful.

That would leave Germany's K+S with limited options, hoping that the long-term demand for fertilizer, driven by the need to feed a growing world population, will push potash prices higher.

Nomura analysts say greenfield ventures pay off at potash prices from $400 (260.42 pounds) per tonne upwards but prices have bottomed out at little below $390 (253.91 pounds) per tonne -- down from peaks of almost $1,000 (651.04 pounds) before the 2008 global financial crisis tipped economies into recession.

"The (Potash Corp) takeover would make K+S's plans more difficult. BHP has indicated several times that they typically run their mines at full capacity and take the market price because they aim to be the lowest-cost producers," said BHF Bank analyst Annett Weber.

"This could limit pricing upside and even result in price pressure, which, in turn, will dim the outlook for greenfield projects," she added.

BHP has made clear it would put output volume over price to take full advantage of Canada-based Potash's low production costs and leave Canpotex, the export arm of Canadian potash producers, to sell independently.

BACK TO BASIC MATERIALS

K+S shares trade at 14.8 times estimated earnings over the next 12 months, Thomson Reuters StarMine data shows, little buoyed by M&A speculation since BHP's move on Potash Corp. and below the multiples of peers such as Mosaic Co (MOS.N) or Uralkali (URKA.MM).

Most analysts say the German company is a less attractive takeover target than peers because of its relatively limited domestic deposits and strong focus on mature European markets.

Still, a shake-up in the industry could tip the scales in K+S's favour, NordLB analyst Thorsten Strauss argued, saying peers could be more inclined to team up with K+S to deter unwanted suitors.

While K+S sits on the world' third-largest minable potash deposits, it is beginning to face up to the expected depletion of German reserves in about four decades.

CEO Steiner -- a former customs lawyer at BASF BASF.DE who is said to take a no-nonsense management approach -- sees little growth outside the group's potash and salt mining business, recently boosted by the $1.7 billion (1.1 billion pounds) acquisition of Morton Salt.

In a reversal of the diversification championed by his predecessor and now Chairman Ralf Bethke, Steiner said in June that he was looking to hive off K+S's Compo unit, with its palette of gardeners' fertilisers and potting soil.

There is also little potential in K+S's nitrogen fertiliser unit, bound by an exclusive procurement deal with former parent BASF BASF.DE, as Middle Eastern rivals such as Sabic 2010.SE have cheaper access to natural gas, the main input for nitrogen.

K+S could have earmarked up to 2 billion euros ($2.7 billion) towards a greenfield joint venture abroad, Bankhaus Lampe analyst Marc Gabriel reckons

The frontrunner is seen as Russian tycoon Andrei Melnichenko, a shareholder who has had a difficult relationship with the company. Through his fertiliser company EuroChem, he holds about 15 percent of K+S and in 2008 was even tipped to harbour takeover ambitions.

EuroChem's fertiliser business wants to tap potash reserves in Russia's Ural mountain range and could use K+S's expertise and capital but talks have dragged on with no deal in sight.

Whether a joint venture could jump-start the share price would largely depend on the terms of a deal and is hard to predict, market participants say.

And while the company is keen to map out a growth plan, some say making the best of its existing mineral resources and maximising payouts to investors might be a better option.

"It might well be in shareholders' best interest for K+S to simply exploit its remaining potash deposits with minimum capital expenditure. But the company will probably take a different view," said one analyst, who declined to be named.

(Editing by Erica Billingham)