The proposed acquisition by BHP Billiton plc (NYSE: BHP) of Potash Corp. of Saskatchewan (NYSE: POT) is not in China’s best interests, and the government is searching for a way to make its own play for Potash Corp. China apparently believes that it must take direct action to stop the sale because it is pretty clear that no other company is going to step up with a counter offer. Rio Tinto plc (NYSE: RTP) and Vale SA (NYSE:
VAL), the two other mining giants who might have the power to bid for Potash Corp., have not shown any interest in doing so.
China is the world’s leading consumer of commodities of all kinds, including potash fertilizer. The country’s stock of arable land is barely able to provide enough crops to feed its population, so increasing food production/acre is central to the government’s long-range goal of reducing dependence on food imports. The Chinese government has launched what amounts to a three-pronged attack on the BHP-Potash Corp deal. First, the country’s government-owned chemical giant, Sinochem, has hired HSBC to advise it on its options regarding BHP’s bid. One obvious option is for Sinochem to tap the country’s sovereign wealth fund to outbid BHP. That option is not likely because the Chinese are very sensitive to being rejected. The memory of the failed bid by CNOOC Ltd. (NYSE: CEO) for the assets of Unocal makes the Chinese government wary of getting slapped in the face again.
To add backing to that concern, the provincial government of Saskatchewan has already stated that an offer by a state-owned enterprise would not be in the province’s best interests. Officials fear that a state-owned firm will lower prices for potash, thereby reducing the government’s revenue. The provincial government does not have the authority to kill an acquisition, by BHP or Sinochem, but it could influence the Canadian national government to stop an acquisition.
The second prong of China’s attack on the BHP acquisition is to threaten an anti-trust proceeding. China does not want to deal with another oligopoly in potash as it now faces in iron ore. BHP, Rio Tinto, and Vale control about two-thirds of the world’s supply of iron ore and have hurt China’s steel industry by changing the iron ore pricing scheme and doubling prices earlier this year.
This attack doesn’t appear to have much strength because BHP currently owns no producing potash mine. The company does have a Canadian potash mine under development, but production is at least four years away.
The third approach the Chinese have apparently tried is to seek cover by attracting a Canadian partner to make a counter offer for Potash Corp. A Canadian pension fund has revealed that Chinese investors have approached the fund about bidding against BHP. Similar offers have also reportedly been made to other Canadian pension funds. So far there have been no takers.
The Chinese could kill the BHP deal by simply continuing to roil the waters. If Potash Corp. shareholders think a better deal is on its way, they may reject the BHP bid on that belief alone. BHP’s $130/share offer represented just a 16% premium to Potash Corp. shareholders. BHP shareholders have already authorized management to offer up to $155/share for Potash Corp. As much as BHP would hate to do it, the company might have to bid against itself if it wants to get this deal done.
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