Potash Corp.'s best hope for a rival offer to BHP Billiton $38.6-billion (U.S) takeover bid faces a potential obstacle in the provincial government, which says it's worried that a state-controlled buyer would drive down the value of its coveted resource.
The Saskatchewan government signalled Wednesday that it is unlikely to support a takeover of the Saskatoon-based company by a sovereign wealth fund or other state-owned firm from China or other large potash-buying nation. The fear is that the new owner's primary motive - to supply food and fertilizer for their populations - would conflict with the province's goal of supporting its people through higher potash prices.
"It would seem to us at first glance that their interest and the interest of taxpayers of Saskatchewan may not be aligned," Saskatchewan Energy Minister Bill Boyd said in an interview.
The provincial government is flexing its muscle in the Potash Corp. takeover battle, knowing that its support for any bid is key. While the province doesn't have the power to stop a bid, it can influence Ottawa's decision on whether or not to approve a takeover. That's why BHP officials immediately traveled to Saskatchewan after launching their bid last month, in the hope of easing concerns about a foreign takeover and its impact on jobs and investment in the province.
So far, Potash Corp. has rejected BHP's $130 (U.S.) per share offer as too low and said it's talking to other companies interested in making a competing offer. Chinese state-owned companies are considered the frontrunners in making a possible rival bid, given their financial clout and need to increase crop yields to feed a growing population as farm land shrinks to make way for increased urbanization. China is already the world's largest potash user, accounting for about one-fifth of global demand.
For Saskatchewan, the concern is that a state-run owner would immediately try to increase production and supplies to maximum levels, which would then drive down prices, and in turn mean lower revenues for the province, and possibly lost jobs.
"Whether it's a China or India or anywhere else that might involve sovereign funds, it's much different than private business interests or publicly-traded companies," Mr. Boyd said. "We believe that under those circumstances, obviously their best interest is to buy at the lowest possible price they can, to set up a supply chain for their country. That is very different than a publicly traded or private company looking to make a profit.
"Regardless of who might enter this arena … we will want to ensure that there is a good return on the potash resource we are blessed with in this province."
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The province is hiring an independent consultant to review the economic impact of a Potash Corp. takeover, the results of which are expected in the coming weeks.
The review will help the province decide if it needs to change legislation to increase revenues from the mining sector through taxation, royalties or permitting. It could also bind any buyer to the Canpotex marketing agency, which is an issue at play in the province's support of BHP's bid. Canpotex sells potash produced in Saskatchewan by Potash Corp., Calgary-based Agrium Inc. and Minnesota-based Mosaic Co., to markets outside North America.
The province has expressed concern about BHP's plans to eventually break up Canpotex and market potash on its own. However, BHP has since backtracked from that stance, saying it wouldn't make a move without the support of Canpotex's other members.
The province's worry about a foreign state-owned enterprise buying Potash Corp. could be considered a boost for BHP's bid, which was the only official bid on the table as of late Wednesday.
Chinese chemical conglomerate Sinochem Group is weighing its options for a potential competing bid to BHP's hostile advance. The Chinese state-owned enterprise would likely have to team with other interested parties such as fertilizer firms, mining companies and investments funds to form an international consortium bid. Sinochem has hired HSBC Holdings to advise it on its options regarding Potash Corp., according to The Wall Street Journal.
Meanwhile, China has its own concerns about a BHP takeover of Potash Corp. Sources have told The Globe and Mail that Chinese government officials are deeply concerned about BHP having so much control over the potash market, in light of its influence in the iron ore and coal markets. China's Ministry of Commerce may launch an anti-monopoly probe of BHP's bid for Potash Corp., the China Business News reported Wednesday, citing a source familiar with the matter.
Under China's Anti-Monopoly Law, which was drafted two years ago, China can review and impose conditions or even attempt to block deals that will concentrate a foreign company's position in a particular market. The United States and Europe have similar anti-trust regulations.
BHP, which currently doesn't produce potash, has said it will only seek regulatory approvals for the attempted takeover in Canada and the United States.
In the past, China's Commerce Ministry has used the anti-monopoly law to review more than half a dozen merger or takeovers. Last month, it granted approval of Novartis AG's acquisition of Alcon Inc. It has, however, blocked one transaction, Coca-Cola Co.'s attempt to takeover Chinese drink maker China Huiyuan Juice Group Ltd. The ministry is also probing BHP's iron ore joint venture with rival Rio Tinto PLC, but has yet to rule on the deal.
Even if China did launch a review and rule against a BHP takeover of Potash Corp., it is unclear how the country could enforce such a decision. Neither BHP nor Potash Corp. has operations or offices in China.