Last-minute plan emerges to keep Potash's independence

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Alberta's provincial money manager is leading discussions by some of Canada's pension funds about a novel plan to preserve the independence of Potash Corp. of Saskatchewan Inc. as the battle for the world's biggest fertilizer company enters its final stage.

The plan, which is considered a long shot, would see the funds take a "blocking stake" - an equity investment of about 30 per cent - in Potash Corp. That would, in theory, be enough to prevent BHP Billiton PLC 's $38.6-billion (U.S.) hostile bid from succeeding.

Potash Corp. would then agree to devote the entire output of one of its larger mines to China in an effort to satisfy Chinese demands for a long-term, guaranteed source of potash. Sinochem Group, China's state-owned chemicals and fertilizer group, is thought to have considered a bid for Potash Corp. out of fear that BHP would control the global supply for potash.

Sources who spoke on condition of anonymity said the plan is designed to satisfy the concerns of nationalists and the Saskatchewan government, who don't want to see another head office lost in a foreign takeover; of the Chinese, who want security of potash supply; and of investors, who would potentially benefit if the Chinese supply contract were to come with an "escalator," in which the price would rise at intervals during the length of the contract.

"This might be an elegant solution for everyone," said a source who is familiar with the effort.

The emergence of the blocking-stake concept highlights how the political and economic debate has changed since foreign acquirers bought three of Canada's largest mining companies - Inco Ltd., Falconbridge Ltd. and Alcan Inc. - in 2006 and 2007. BHP's Potash bid appears to be running into more political opposition than those takeovers did.

The source, however, attached a fairly low probability to the success of the blocking stake idea. He said part of the problem was the difficulty in judging Chinese interest in playing a role in Potash Corp., on either the investment or supply side.

Another potential obstacle is the cost. A 30 per cent stake in Potash would still be about $13-billion at the company's current stock price, which would mean several investors would have to commit to it before it could go ahead.

A third problem is lack of time. BHP's all-cash bid expires on Nov. 18, giving any rival investors only a month to put together a counteroffer. BHP's $130-a-share offer (about $131.50 Canadian) is the only bid on the table. The shares closed on Friday at $144.90 (U.S.) in New York and $146.78 (Canadian) in Toronto.

Sources said the plan is being championed by Alberta Investment Management Co., known as Aimco, led by Leo de Bever, the fund's CEO and chief investment officer.

Aimco is said to believe its proposal would appeal to China, which has considerable experience in commodity supply contracts in Africa and Latin America. They are known as direct-sale or off-take deals, in which the Chinese invest in, or agree to take the supply from, a particular resources project. The arrangement eliminates the often politically sensitive need to invest in or control the company that owns the project.

In such arrangements, the commodity - be it oil, natural gas, iron, base minerals - doesn't go through the London Metal Exchange or other public markets. There are no intermediaries. The commodity is in effect locked up and taken off the global market.

Commitments to invest in local infrastructure often accompany the direct-sale deals. For example, in Nigeria, a $2-billion (U.S.) infrastructure and energy deal gave the Chinese a 45 per cent stake in the offshore Akpo oil field. This means the Chinese are entitled to 45 per cent of the production. Deals of the same size or bigger have been negotiated in Sudan and Angola.

Potash Corp. has five major potash operations in Saskatchewan and one in New Brunswick. Collectively, they account for about 20 per cent of global supply. Under the Aimco plan, the Chinese would buy all the production from one of the mines. The sources said the Chinese may not be the legal owners of the mine, though they might want to have that option.

Potash Corp. has rejected BHP's offer as too low, but has been hard-pressed to come up with a viable alternative that would provide shareholders more value than BHP's bid, especially now that Sinochem Group's interest in leading a takeover bid has apparently waned. Sinochem Group backed away after talks with several investment groups, including the Canada Pension Plan Investment Board, fell through, sources told The Globe last week.

One alternative the fertilizer company is working on is a breakup of Potash Corp.'s assets that would see the sale of the firm's nitrogen and phosphate business, the addition of debt to the balance sheet and a special dividend payment to shareholders of $70 a share. At least one Canadian pension fund has held talks with Potash Corp. regarding such a scenario, according to a source.

A special dividend that high would cost almost $21-billion and analysts and investors have put a low probability on it, because taking on so much debt would jeopardize Potash Corp.'s credit rating. The company is rated A-minus by Standard & Poor's.

With files from Brenda Bouw