BHP end game for PotashCorp?

Earlier the same week, it emerged that Ontario Teachers’ Pension Plan (OTPP) had made overtures to Singapore SWF Temasek Holdings about some kind of partnering arrangement. Rumors had been circulating that the Chinese company was seeking to forge a consortium with Temasek, and industry observers assumed that the SWF’s preliminary discussions with Sinochem might once again be on the front burner, with OTPP aiming to take a blocking position vis-a-vis the BHP bid.

Sinochem had never officially been in the game, and Temasek likewise never acknowledged involvement. And although how a pension plan would figure in such a takeover bid was also unclear, the broader thinking was that any bid would only be successful if it included a politically palatable partner with demonstrable large-scale mining expertise. For example, Canadian mining leader Teck Resources’ name had been bandied about, though without any evidence that they were engaged. So was Indian iron ore producer NMDC, another SOE; but its much smaller size made it a dubious contender.

The only serious competition

BHP’s view had always been that Sinochem was its only real competitor, market sources say. And the motivation for Sinochem having to take an interest was clear.

For the Chinese, securing future food supplies is a political priority. So whoever controls PotashCorp, given its dominance in the global fertilizer market (more than 50%) has considerable pricing power in this key commodity.

Sinochem’s SOE status – and resulting strong ties to the Chinese government – added a further political dimension to any bid. Given past reversals in such cases, Sinochem would need assurances in advance that theirs would be seen favorably by the Canadian authorities. And that seems to be where the rub was.

PotashCorp is a national icon in Canada, and has recently issued a ‘Pledge to Saskatchewan’ that the status quo of benefits to same will be maintained regardless of any deal. So the conclusions drawn by a recent Canadian Conference Board report would certainly have been seen as a red flag by Sinochem. If OTPP had become part of a consortium bid, Sinochem might have had at least some political cover.

The crux of the matter

Apart from general concerns that the company’s headquarters and associated jobs remain in Saskatchewan, the big sticking point was that, given the nature of the province’s tax and royalty regime, the fiscal impact of future operation strategies of PotashCorp. in a high-production scenario could result in a significant lowering of the world potash price. This would happen, the report conjectured, if an acquirer chose to ignore market disciplines and compete for global market share by producing higher volumes at lower prices. The knock-on effect, from a Canadian perspective, could be a loss of some $5.7 billion in taxes and royalties.

The report concluded that it was ‘unlikely’ that BHP would pursue such a strategy, simply because doing so would not be the best way to maximize their ROI. But it cautioned, “...the province should be concerned about a bid from a state-owned enterprise like Sinochem, especially (since) it is an SOE from a major importer country (China).

“SOEs such as Sinochem simply do not face the same commercial constraints as do commercial enterprises like BHP. Therefore, we believe that Sinochem is likely to not demonstrate market discipline to support the potash price. (Rather) Sinochem has a strong incentive to lead the world marketplace toward price competition, which would hurt all Saskatchewan producers, and indeed global producers, of potash.”

As an example, they noted that China had been one of the few countries to not cut potash production in 2009 in response to falling demand and prices.

Clear seas now for BHP?

So while Sinochem’s withdrawal might look like a green light for the BHP’s $130-per-share bid as presently constituted, PotashCorp.’s public rejection of it as “wholly unacceptable” says that it is not. Still, that was weeks ago, when CEO Bill Doyle claimed a variety of other suitors had expressed interest in the company. However, none of these has crystalized into a counteroffer to date.

At the same time, PotashCorp remains mindful that its shares were trading for about $240-per-share as recently as 2008, in the agri-boom of that time. And the long-term prognosis for the food sector as a whole is bullish. The speculation is that PotashCorp. has various defensive options, such as selling off some key assets to enable a ‘special dividend’ to stakeholders.

Thus, it looks like price is the key issue now. And last week PotashCorp requested a US court to force BHP to disclose all communications with regulators and governments related to its bid. Additionally, with Germany having announced October 13 that it will ban BHP’s proposed $116 billion iron ore joint venture with Rio Tinto, the Australian miner is under increased pressure to get a significant deal done. 

Further reading

Potash a hot commodity

• Australasia
• 01 Sep 2010

Ontario Teachers seeks Temasek's help to rival BHP Billiton PotashCorp bid

• Buyouts
• 11 Oct 2010

Hopu may bid for Potash

• Industrials
• 24 Aug 2010

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