Aug. 17, 2010, 7:36 a.m. LONDON (MarketWatch) -- Shares of...

Aug. 17, 2010, 7:36 a.m.


LONDON (MarketWatch) -- Shares of Potash Corp. of Saskatchewan Inc. soared 26% in premarket trading Tuesday after the world's top fertilizer producer rejected a $38.6 billion unsolicited takeover bid from mining giant BHP Billiton and adopted a rights plan.

The board of Potash unanimously rejected the $130-a-share cash offer, calling it "grossly inadequate."

The board "unanimously believes that the BHP Billiton proposal substantially undervalues Potash and fails to reflect both the value of our premier position in a strategically vital industry and our unparalleled future growth prospects," Potash Chairman Dallas Howe said in a statement.

At $130 a share, the BHP offer represents a 16% premium over Potash's closing price of $112.15 on Monday.

In a letter to the chairman of BHP, Howe said the group's approach was "highly opportunistic" given that the fertilizer industry is in the early stages of a recovery, and an "ill-disguised attempt" to exploit an "anomaly" in the equity valuation of the company.

Potash said it is at an "inflection point" and expects demand for its products to pick up as the world economy returns to growth. On top of potash, a commodity primarily used as a fertilizer, it supplies animal feed and industrial chemicals.

BHP, the world's largest mining company, is keen to expand in potash and has already set in motion plans to produce around 8 million tonnes a year, or 12% of global production, in Canada.

A spokesperson from BHP wasn't immediately available to comment.

In a separate release, Potash said it's adopted a rights plan intended to prevent anyone from building more than a 20% stake in the company, thus insuring it has sufficient time to review its options in case of a formal takeover bid.

Under the rights plan, the board authorized the issuance of one share purchase right for each common share outstanding at the close of business on Aug. 16.

Shares of Potash rose 26% in U.S. premarket trading. BHP shares fell 1.7% on the London Stock Exchange.

BofA Merrill Lynch, Goldman Sachs and RBC Capital Markets are acting as financial advisors to Potash.

Jeremy Cave, an analyst at MF Global, said BHP's approach was not surprising considering they have been talking about expanding their position in potash for years.

The current offer would take BHP's gearing to around 50%, which is "fairly high" in that market, he said. He noted that a rights issue could be an option to fund a bigger offer.

Aude Lagorce is a senior correspondent for MarketWatch in London.