China is emerging as the pivotal player in discussions around a bid for Potash Corp. that would be rich enough to rival giant miner BHP Billiton Ltd.'s $38.6-billion (U.S.) hostile offer.
A handful of state-owned Chinese companies, including chemical conglomerate Sinochem Group and energy firm China National Offshore Oil Corp. (CNOOC Ltd.), is considering a potential bid for the world's largest potash producer. China's goal is to secure a significant share of the crop nutrient that has become crucial to the agricultural sector as the country of 1.3 billion increasingly taps its farmland to meet fast-growing demand for food.
Over the past week, teams of North American bankers have travelled to China to pitch potential bidders their ideas of how to rival BHP's $130-a-share, all-cash offer, which has been rejected by Saskatoon-based Potash Corp. as too low.
Government officials are prepared to back an offer, and Sinochem and CNOOC are the likely leaders of possible bid structures under consideration, according to people familiar with the situation.
"There is clearly political support … CNOOC is taking it very seriously and so, too, is Sinochem," said a banker close to the matter.
China's role in determining the future ownership of Potash Corp. underscores the country's soaring economic might and the maturation of its booming corporate sector. Mining companies such as Rio Tinto PLC are closely following China's steps as they decide whether to put together a competing offer. If a China-backed bid emerges, it would set a precedent, marking the first time a Chinese firm has jumped into a high-profile takeover battle in Canada's resource sector.
The continuing discussions between Chinese executives and government officials are expected to determine which Chinese entity, or entities, will become the cornerstone for a possible competing bid.
"The best shot is for something to be done is with cheap cash from China," said another investment banker familiar with the situation.
Sinochem, China's largest fertilizer trader, is seen as the most logical candidate to lead a bid for Potash, which has a 22-per-cent interest in Sinochem's fertilizer unit, Sinofert.
On Thursday, Sinofert chief executive officer Feng Zhibin told reporters in Hong Kong that the companies "continue to closely watch the deal," but declined to comment on whether they are considering a counterbid.
China Investment Corp. (CIC), the country's sovereign wealth fund, is also a possible bidder, but sources say it would most likely play a supporting role. CIC is focused on investments that offer high returns, rather than those that carry strategic importance for China.
China's interest is driven not only by a need to feed its growing population, but also its discomfort with the idea of BHP controlling a large chunk of the potash market.
BHP has already flexed its muscle with China in the iron ore and coal market by recently forcing a move to shorter-term price contracts. Chinese officials are wary of the Australian mining giant gaining a leading role in another key commodity.
The major stumbling block for a Chinese-led bid, however, is the fact that Ottawa, through the Investment Canada Act, could block such a deal. The act, which governs major takeovers of Canadian companies, holds foreign state-owned entities to more rigorous standards than private foreign companies. Since the act was amended to include special stipulations for state-owned firms, it has never been tested.
For that reason, a Chinese bid would likely be structured in such a way that the Chinese companies do not have majority control of Potash Corp.
Still, China is viewed as the best possible source of cash to back a counterbid for Potash Corp. Given its heft and healthy balance sheet, BHP can pay more than most for Potash Corp. A bid backed by China would help level the playing field.
Rio Tinto is still seen as the strongest challenger if it comes into the battle, especially in a joint deal with a Chinese entity, sources say. Rio is said to be waiting to see what China wants to do, then will decide whether to enter the fray in a way that would keep its portion of the bid manageable.
Rio is shy about making a big acquisition after being tied down with debt when it acquired Alcan in 2007, months before the global economic meltdown. It was forced to sell its potash assets to help pay down debt, but analysts say it's still interested in the ingredient, in particular given that future global demand is expected to soar.
Canada's Teck Resources Inc. is considered a long-shot in a joint-bid for Potash Corp., given its relatively small size, the trouble it had with its last acquisition and its seeming disinterest in the commodity, sources say.
Other players in potash such as Agrium Inc. and Mosaic Co. have also gotten a lot of attention from bankers, but Agrium appears focused on its strategy of buying other fertilizer assets and Mosaic is viewed as a slow-moving organization that isn't motivated to make a bid.
If anybody jumps in, it's not likely to be in the coming days, according to bankers.
"Everybody will lie in the weeds as long as possible," said one.
On Wednesday, BHP CEO Marius Kloppers tried to convince investors a competing bid is unlikely.
"We've only got a 50-per-cent minimum acceptance condition on here, so that hopefully will send a clear message to anybody that hopes to take a 5- or a 10-per-cent stake in hopes of blocking us that that won't deter us," he told The Globe and Mail.
"This is a cash bid. It's a large bid. Again, the universe of possibilities here are probably not endless."