Thursday, November 4, 2010

Canada Surprises Market by Rejection of BHP Billiton's (BHP) Bid for Potash (POT)

A quite stunning rejection of the BHP Billiton (BHP) bid for Potash (POT).  While "conditional" on the surface, it appears to have driven a stake through the heart of the deal.  What is fascinating is these are 2 cultures that both derive from England, so it is not a matter of "some foreigners want to take our best assets" as we have seen in other countries.  Heck even the USA with Dubai Ports.  But if one thinks out 30-50 years, a case could be made for what Canada is doing in terms of securing a long term commodity asset.  Remember, the world's potash supplies are essentially controlled by 2 mini cartels - one in the West and one in the Russian + its former satellites area.  With that said, I don't know enough about the politics in Canada to determine if this move is truly a "long term" strategic decision or simply a short term political maneuver to placate the 80% of Canadians who were against the deal.   I am sure the "free marketists at all costs" are in complete horror over this type of move.

Stock wise, in retrospect the decision to sell Potash (around $144) very shortly after the deal was announced in retrospect was a smart one as the stock has done little in the meantime, while the market has gone parabolic.  I'd also offer that the U.S. cares little about its long term assets, so BHP should make a bid for Mosaic (MOS) - unlike China which is busy securing commodities for the next 50 to 100 years, American assets are happily sold to the highest bidder, whatever the long term implication.

Potash is down about 4.5% on the news, while BHP is rallying - this is the 2nd or 3rd mega purchase BHP has attempted the past 3-4 years that has failed.   As for a new bid for Potash - if the government is not willing to sell to Australians, you can forget any bid by the Chinese or Russians.

Via Reuters:

  • Canada blocked BHP's audacious $39 billion bid for Potash Corp and left little room for a modified offer, throwing the spotlight on how the world's largest miner can find new avenues for growth.
  • The government said the deal would not benefit the country, delivering a major blow to BHP Billiton Chief Executive Marius Kloppers after the 2008 failure of a $120 billion-plus takeover of rival Rio Tinto and the collapse of a $116 billion iron ore joint venture with Rio earlier this year.
  • BHP investors are betting the Anglo-Australian miner will now return capital through a share buyback or expand its interests in oil and gas in an effort to put its growing cash pile to work.

  • While Canada gave BHP 30 days to come up with additional proposals that might make its offer for the world's largest fertilizer producer more palatable, the chances of a successful modified bid appeared remote.
  • "Marius Kloppers is going to be pretty frustrated. BHP is of a size now where just about anything it wants to do of any substance is going to get blocked on regulatory grounds," said Cameron Peacock, market analyst at IG Markets in Melbourne. (except in the US where regulation of any sort is "evil"...or perhaps Hungary where red toxic sludge running through villages is just part of the 'free market')

The politics of it all:
  • The decision was only the second time Canada has blocked a foreign takeover since 1985, sparking criticism the minority Conservative government was putting politics before business.  "Some decisions can only be taken once and there is no turning back ever -- such as the case today," Industry Minister Tony Clement said in ruling he was not satisfied about the net benefit to Canada.
  • Clement said he was unable to release the precise reasons for the decision, which came after strenuous objections from Potash Corp, its home province of Saskatchewan and customers of the crop nutrient essential for boosting crop production.
  • The decision surprised investors as well as BHP's executives and advisers. Potash Corp shares were down some 5 percent in after-the-bell trade while BHP shares rose 2.6 percent to A$43.72, their highest close since April, on expectations BHP would consider returning capital to shareholders.
  • China, a major potash user worried about BHP's influence over supply of another key commodity, welcomed the decision.  "The failure by BHP is good for China ... If we can largely meet our demand with our own supply, the market may not be controlled by one company," said a senior official at the potash branch of the China Inorganic Salt Industry Association.
  • Under the Investment Canada Act, a foreign takeover must have a net benefit for the country in terms of jobs, exports, production and investment. 
  • The Conservatives have most of the seats in Saskatchewan, the Prairie province where Potash Corp is based, and fervent Saskatchewan opposition to the bid meant they risked losing those seats in an election likely to take place next year.
  • Saskatchewan argued it would lose tax and royalty revenues if the deal went through. It said it would be wrong to let a resource as strategic as potash fall into foreign hands.
I guess "Conservative" in Canada means a very different thing than in the U.S.

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