China’s state-owned chemical company Sinochem has reportedly hired two investment banks to help it figure out what to do about the potential acquisition of Potash Corp. (NYSE: POT) of Saskatchewan by BHP Billiton plc (NYSE: BHP). The two banks are Deutsche Bank AG (NYSE: DB) and
Citigroup, Inc. (NYSE: C).
The Financial Times reports that Sinochem has also sought support from a Chinese bank, thought to be the Industrial and Commercial Bank of China. Deutsche Bank, Citi, and the ICBC are not talking.
Sinochem, as well as the Chinese government, have been considering different options since BHP made its $38.5 billion offer for Potash Corp. Because the country imports about 10% of its potash requirements, the government has a keen interest in where that supply comes from. BHP has already burned the Chinese once this year by changing the company’s pricing scheme for iron ore and the government does not want to see the same thing happen with other commodity products. It especially doesn’t want to see BHP gain more leverage over crucial resources.
But the Chinese government also does not want to go it alone. It is sensitive to the embarrassment of having its bid rejected by the Canadian government, which must approve any potential deal for Potash Corp. The provincial government of Saskatchewan has already gone on record against a purchase by a foreign government. While the province can’t kill the deal, its opposition will weigh heavily in the national government’s decision. Both the provincial and national governments fear that having a foreign owner that is also a major customer gives too much pricing power to that owner/customer. The interests of the Canadians to maximize the value of their assets would clearly be at odds with the interests of a Chinese owner.
Sinochem may also try to assemble a consortium to make a counter offer for Potash Corp. or, at least, to buy a significant minority stake. At least one Canadian pension fund was approached earlier this month, but has not agreed to sign up. Singapore’s foreign investment company, Temasek, has also been asked to join in a counter offer, but apparently has not yet decided what to do.
Potash Corp.’s share price is already well above BHP’s offering price, indicating that investors have already priced in a competitive bid. BHP has extended its offer until November 18th due to a request for more information by the Canadian government. That gives Sinochem more time to put together a coalition if that is the path the company intends to follow. But as more time passes without a competing bid, Potash Corp. shareholders may decide that BHP’s offer is not so bad after all.
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