The Chinese government is close to a decision on how it plans to fight mining behemoth BHP Billiton Ltd. for control over the world's largest potash producer, Potash Corp. of Saskatchewan Inc.
China is considering a number of key proposals from state-owned firms, including how to structure the deal and what price it must pay to beat BHP's $38.6-billion (U.S.) hostile bid, according to sources familiar with the situation.
While China hasn't said for sure that it will bid, sources say the Asian superpower is "very, very interested" in making an offer to both upset BHP's plans to take control of the potash market as well as to secure its own source of the coveted crop nutrient.
A Chinese government decision on which bid it will put forward could come by the end of the month, before a week of national holidays in China that begins on Oct. 1.
State-owned chemical conglomerate Sinochem has cited potash as key to national food security as part of its pitch to buy Potash Corp., the Beijing-based Economic Observer newspaper reported Sunday.
Citing unnamed sources, the newspaper said Sinochem has made a formal pitch to the government to back a bid that could climb as high as $60-billion, a stretch for a chemical conglomerate that had $25-billion in assets at the end of 2009.
The Globe and Mail reported last week that Sinochem was in London looking for financial support for a Chinese-led bid for Potash Corp., either through financing or by joining a consortium to trump BHP's offer. Sinochem is the parent of China's largest fertilizer firm, Sinofert, in which Potash Corp. has a 22-per-cent stake.
It's unclear, however, whether Sinochem would be China's preferred vehicle to lead a rival bid for Potash Corp.
Another serious contender with more financial clout is fertilizer firm China Blue Chemical Ltd., a division of state-owned China National Offshore Oil Corp. (CNOOC), sources have told The Globe.
Hong-Kong listed China Blue Chemical publicly stated in August that it planned to use its strong financial position to expand market share "by tapping market and acquisition opportunities in line with our business strategy."
China Blue Chemical is the largest nitrogenous fertilizer manufacturer in mainland China, with a market value of $3.4-billion (Canadian). Its parent, CNOOC, has a market capitalization of $87.4-billion.
Saskatoon-based Potash Corp. is the world's largest potash producer and the third-largest producer of nitrogen and phosphate, all of which are used to produce fertilizer. The company's nitrogen and phosphate assets are valued at more than $8-billion.
The Globe and Mail reported last week that Potash Corp. has been working to assemble a Chinese-led consortium of investors to back a competing bid with support from the company's senior management that would challenge BHP's $130-per-share offer. Potash Corp. has condemned the BHP bid as too cheap and opportunistic at a time when it believes potash prices are poised to take off.
A management-supported bid would include significant capital from a Chinese resource company or investment fund, which would then be combined with smaller contributions from international sovereign wealth funds and possibly Canadian financial players such as pension funds.
Together, these investors could provide enough capital to top the BHP bid, including some debt financing and potential asset sales. In this scenario, key management from Potash Corp. would remain in place to run the company.
Potash Corp. chief executive officer Bill Doyle has said "BHP will not be the only bidder" and, with the company's shares trading just below $150 in recent weeks on the New York Stock Exchange, many expect a rival bid or an improved offer from BHP.
BHP's bid and a possible offer from China both face political hurdles. BHP has said it plans to keep jobs and Potash Corp.'s head office in Saskatchewan, but its plans to pull out of the Canpotex marketing arm has created an uproar. The Saskatchewan government is concerned BHP's move will drive down potash prices; that will mean lower revenues for the province, which collects royalties from the resource.
A Chinese-led bid is also of concern to Saskatchewan because of China's motive to secure supply, which the province fears would also mean lower prices as a result of overproduction.
Saskatchewan has hired the Conference Board of Canada to review risks and opportunities behind a takeover of Potash Corp., one of its largest taxpayers. The report is due by the end of the month and will form the basis of the province's decision whether to support a takeover bid for Potash Corp. Its support will weigh heavily on Ottawa's decision whether or not to approve a takeover and whether it's of "net benefit" to Canada as defined by the Investment Canada Act.
Meantime, BHP officials are in Saskatoon Monday to open a corporate office as part of a potash development project in the province. They are also expected to meet with provincial officials about the Potash Corp. bid.