Anyone who expected the Canadian government to approve the $38.6 billion bid from BHP Billiton plc (NYSE: BHP) for Potash Corp. (NYSE: POT) of Saskatchewan has not been paying attention. The provincial government of Saskatchewan recommended that the BHP acquisition be rejected because it did not offer any benefit to the province.
The national government apparently agreed. The country’s industry minister said that BHP had not shown that the deal created a “net benefit” for Canada.
There are two primary objections. First, the province commissioned a study that concluded that “BHP Billiton’s proposed takeover of Potash Corp could reduce provincial revenues by at least $2 billion over the next 10 years while having little or no net effect on employment in the industry.”
Second, the BHP offer puts in jeopardy the country’s potash export marketer, Canpotex, which is owned by Potash Corp., subsidiaries of Mosaic Corp. (NYSE: MOS), and Canadian fertilizer maker Agrium Inc. (NYSE: AGU). At the time BHP made its offer for Potash Corp., the Australian company indicated that it preferred to sell its potash fertilizer independently, not through the Canpotex cartel.
That position was not likely to endear BHP to either Agrium or Mosaic. BHP would most likely have wanted to sell its potash under short-term pricing arrangements rather than the long-term contracts favored by Canpotex. This idea fits neatly with BHP’s recent move to short-term pricing for iron ore, rather than the long-term deals that used to predominate in that part of its business.
If BHP were to abandon Canpotex, that would have a negative impact on the royalties the provincial and national governments receive from potash shipments. In an effort to allay government fears, BHP issued a “Pledge to Saskatchewan” that included a commitment to Canpotex that was not as strongly worded in favor of the cartel as the governments might have wished.
BHP has 30 days to continue discussions and to try to reverse the government’s decision. BHP may also choose to raise its bid for Potash Corp. or to withdraw the $130/share offer altogether. A government reversal seems unlikely because Saskatchewan’s premier is dead-set against the deal under any terms.
If the deal doesn’t get done, Potash Corp. shareholders are likely to rebel. The company’s shares were trading at around $112 before BHP’s offer. Share prices went as high as $150/share on the belief that BHP would either have to raise its bid or that there would be a competitive bid. Neither now seems likely.
Amazingly Potash Corp.’s share price has only dropped to around $140 this morning, down about -4%.
As of this writing, Paul Ausick did not own a position in any of the stocks named here.
