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BHP CEO Marius Kloppers participates in a Globe and Mail editorial board meeting on Tuesday Sept. 21, 2010. (Fred Lum/Fred Lum/The Globe and Mail)
BHP CEO Marius Kloppers participates in a Globe and Mail editorial board meeting on Tuesday Sept. 21, 2010. (Fred Lum/Fred Lum/The Globe and Mail)

Potash: The deal that didn't have to die Add to ...

Marius Kloppers strode into a downtown Chicago hotel in the middle of a searing heat wave to launch an ambitious takeover strategy that had been on ice for more than five years.

The South African-born chief executive officer of Australian mining titan BHP had arranged to meet secretly on Aug. 12 in a room at the Four Seasons with Bill Doyle, the platinum-haired chief of Potash Corp.

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Mr. Kloppers explained to Mr. Doyle that, after quietly coveting Potash Corp. for years, BHP had authorized him to offer nearly $40-billion (U.S.) to take over the company, a 20 per cent premium from the previous day's trading. Complimenting Mr. Doyle on the "unbelievable" value he had created for shareholders, Mr. Kloppers confided that he had "choked" several times at Potash's high stock price.

When the two men finished the cordial 35-minute meeting, Mr. Kloppers had every reason to believe that the takeover odds were on his side. Potash prices were still climbing out of the cyclical basement, and few other companies in the world could match BHP's financial heft to top the bid. A government-backed company from China probably could, but no Chinese entity has ever tried to make such a large acquisition in a developed, democratic country. Even better, the widely held Saskatchewan company had no blocking shareholders. The Canadian government had never rejected a foreign takeover of a major resource company, and just three years ago allowed Rio Tinto PLC to take over Alcan Inc. of Montreal in a deal of similar size.

It was a great pitch. But what Mr. Kloppers didn't understand that day was that he was making it to the wrong man.

Nearly 2,000 kilometres to the northwest, in a city the BHP boss had never visited, was someone he had yet to meet who would play a large role in determining the fate of the blockbuster offer for the world's largest fertilizer producer.

Brad Wall, the Premier of Saskatchewan, would wait four more weeks for Mr. Kloppers to pay his respects. The delay would be one of several critical missteps that would eventually poison the relations between BHP and Mr. Wall's business-friendly government and people it represents. Less than three months after that Chicago meeting, that takeover proposal that BHP dubbed Project Porcupine has degenerated into one of the prickliest corporate and political messes ever seen on the Canadian takeover field.

For Mr. Kloppers, this week's rejection of the deal is a serious blow, not just because it is the third time in three years as CEO that BHP has failed to close a major transaction but because Potash Corp. was his perfect target. A company of BHP's size - it has a market capitalization of about $240-billion and produced $18-billion in operating cash flow in its latest fiscal year - needs to make very large investments to grow. It isn't easy to find them, especially given the company's stated strategy of owning only high-quality assets. "We allocate capital only to long-life, low cost, Tier 1, upstream, export-oriented or selling into large markets type of assets," Mr. Kloppers said. Potash Corp. "absolutely fits that."

Now, barring an unlikely last-minute change of heart by the Harper government, it is beyond its grasp. BHP's bid set off a cacophonous debate over the deal that threatened to loosen the Conservative party's grip on its Western Canadian stronghold, stirred a latent nationalism in the country's staid business community and sent an abrupt message to the world that Canada is not quite as open as it used to be to foreign investment.

The most remarkable thing of all is that no one saw it coming.

BHP Billiton made some fundamental mistakes in its pursuit of Potash Corp, say mining, mergers and acquisitions experts and analysts. It needed to convince investors, politicians and the public that its takeover proposal would enrich them, financially and economically, and it failed on all counts.

"This for sure did not have to happen. They could have built support for this deal," said veteran government affairs adviser Jamie Watt, chairman of Navigator, an Ottawa-based government relations consulting group that was not involved in the transaction.

"I don't think BHP spent 10 minutes looking at the local politics," said Pierre Lassonde, chairman of Franco-Nevada Corp. and former president of Newmont Mining Corp., the world's second-largest gold miner. BHP executives assumed, wrongly, that the relaxed attitude toward foreign takeovers that existed before the financial crisis still prevailed today. "They looked at Inco, Falconbridge, Noranda - all gone - and said 'That's enough for me.'"

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