Potash takeover failure blamed on billion-dollar pledge requirement

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In the weeks before it rejected the bid, the Harper government threw a massive hurdle in front of BHP Billiton's controversial takeover of Potash Corp. - demanding an investment commitment that the Australian company would find almost impossible to make.

Stephen Harper says his government followed foreign takeover law in blocking BHP's controversial $38.6-billion (U.S.) offer for Potash Corp. on Nov. 3. But the rules are broad and vague, giving Ottawa plenty of room to manoeuvre when decisions carry political risk - such as the prospect of a Saskatchewan voter backlash that threatened to follow the sale of a provincial icon.

Both federal sources and BHP now say that Ottawa insisted the mining giant provide a solid pledge to develop a massive potash deposit in south-central Saskatchewan - even though the company had not completed the preliminary work necessary for a final decision on this project.

Outside estimates say the proposed Jansen mine would require up to $12-billion in investment to complete. If ever completed, it would become Saskatchewan's first new potash mine in 40 years and generate thousands of new jobs for the province.

Analysts say it appears Ottawa was weighing down the negotiations with demands that BHP would clearly be unable to meet. The company still must do pre-engineering work on the project and get environmental approvals before its board of directors makes a final decision on whether to proceed.

Ottawa's demand "sure sounds poison pill-ish," said Robert Johnston, an analyst with Washington, D.C.-based Eurasia Group.

"Either they knew BHP couldn't meet it or they didn't know how the investment process works - and neither option is particularly flattering," said the analyst, who advises international clients on countries' political risk.

BHP defended its refusal to offer Ottawa an ironclad promise to develop Jansen.

"During our discussions with the IRD, BHP Billiton understood that the Minister would require, amongst other things, a firm commitment that BHP Billiton would execute the Jansen project," company spokesman Ruban Yogarajah said.

He said the company could not circumvent controls in place to protect its shareholders by making such a pledge without due diligence first.

"We are unable to guarantee external approvals and the internal approval processes are designed to safeguard investment in the interests of ensuring shareholder value," Mr. Yogarajah said.

"All major companies follow a process to evaluate and approve major investments," he said.

"This is a fundamental fiduciary and legal obligation of any board and management team and we could not … undermine this governance process by making commitments of billions of dollars before due process was followed."

Now that BHP has withdrawn its bid, Industry Minister Tony Clement is readying to clarify the rules for foreign investment in Canada in the wake of the Potash Corp. decision. This was initially planned for Dec. 3 but BHP's decision to walk away has likely sped up the timetable.

Mr. Clement's challenge, however, will be to avoid creating the impression that the Conservatives changed the rules for outside investors during its deliberations over the BHP bid.

The day after Ottawa blocked the bid, Agriculture Minister Gerry Ritz suggested it was because Potash Corp. was a "strategic resource." But the word strategic is not found in the Investment Canada Act, which suggests the Tories invented new rationale to reject the takeover.

Glen Hodgson, chief economist at the Conference Board of Canada, said the government needs to send clear signals to the international business community about the rules for foreign investment in Canada.

"Investors would like to see a clear statement of what the norms are and what the expectations are," said Mr. Hodgson, co-author of a study commissioned by Saskatchewan on the ill-fated BHP bid.

In that report, the Conference Board warned the rejection of the BHP deal could send a signal that Canada - and Saskatchewan - were less open to foreign investment, a perception that would result in less resource development in the future.

"If you do it through case law, the cases don't seem to be particularly well aligned. We have past decisions and now we have this and frankly none of us understand exactly why. And public policy is better if everybody has the same understanding.

"The more clarity we have, the easier it is to sell Canada as an attractive foreign investment destination."

Foreign investors may have been surprised by Ottawa's rejection of BHP, but they shouldn't have been shocked, given the immense political pressure the Harper government was facing, said the Eurasia Group's Mr. Johnston.

"The only real risk is if they don't come up with a good clarification on why they made the decision, and some clearer indication for the future," said the analyst, who has been fielding queries from international clients on the decision.

Still, he said, it will be tough to come up with a policy statement that would cover such diverse assets as oil-sands companies and key high-tech firms like Research in Motion.

Mr. Johnston added that Canada's trading partners will be watching the Harper government's effort to clarify the rules and may move to match any perceived barriers to takeover of companies in sectors that are considered strategic.

"Other countries will be looking at the new guidelines - this isn't just about Canada any more."