Potash Corp. of Saskatchewan Inc. is working to assemble a Chinese-led consortium of investors to back a leveraged buyout with senior management that would trump BHP Billiton Ltd.'s $38.6-billion (U.S.) hostile bid.
The plan being considered 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. Strategic partners such as rival potash producer Mosaic Co. could also be part of the consortium, sources say.
Together, these investors could provide enough capital to account for as much as half of the funds needed for an offer that would top the BHP's $130 per share unsolicited bid. The rest of the offer to shareholders would be financed through debt as well as potential asset sales, and key management from Potash Corp. would remain in place to run the company.
"It is a viable option," said a source close to Potash Corp. who spoke on the condition of anonymity. The source also cautioned that there are significant difficulties in finalizing a consortium's structure and that other options were still possible.
"It is still a big cheque to write....and it is a challenge to manage multiple parties," the source said.
The proposed buyout plan is, however, being strongly considered as the Saskatoon company's primary defence against BHP, in the event that a competing bid from another mining or resource firm fails to emerge -- a scenario that seems increasinly likely as potential players such as Teck Resources Inc. count themselves out of the running.
The structure of the plan is also gaining favour with both the company and potential consortium members, in part because it is believed such a proposal could be palatable for both federal and provincial governments and would be able to satisfy regulatory concerns. It would also fulfill China's needs to secure potash for its growing population, and eliminate concerns that BHP could come in and control a large chunk of the market.
China is the world's top consumer of potash, a nutrient used to enhance crop yields. However, the prospect of a state-backed Chinese company taking over Potash Corp. would face significant regulatory scrutiny and could be blocked under the Investment Canada Act or fail to win support from the Saskatchewan government, which has expressed concerns about a potential Chinese bid.
"China is highly reliant on potash imports," Commerce Ministry spokesman, Yao Jian said Wednesday at a regular news conference in Beijing. "We will be paying close attention to this deal."
China's Sinochem Group has been considering getting involved in a rival bid for Potash Corp., according to sources. On Wednesday, Caijing, a Chinese magazine reported that Sinochem vice-president Han Gensheng said a $10-billion investment in Potash Corp. is too large for the company and "not a good deal." Hours later, however, Mr. Gensheng's comments were removed from Chinese websites and Caijing later retracted the story saying the interview never took place.
Politically charged comments - even those made by well-placed official sources - frequently disappear from Chinese websites. When they do, it's usually interpreted as a sign someone higher up the political chain disagreed with the remarks.
Sources say China's State Council is still considering how exactly to approach a possible bid for Potash Corp.
A consortium of investors including a minority Chinese interest backing a leveraged management buyout may allay political concerns over China's role in a Potash Corp. bid as company management could be used as a friendly domestic face leading the offer and keeping the company locally controlled.
Potash Corp. CEO Bill Doyle has said "BHP will not be the only bidder" for the company. However, a full-blown bid for Potash Corp. from a mining company capable of competing with BHP's offer appears increasingly unlikely.
Brazil's Vale S.A. has said it is not planning a bid for Potash Corp., and while Rio Tinto PLC is believed to be interested in Potash Corp., its CEO has said the company is focusing on acquisitions of less than $10-billion.
Potash Corp. spokesman Bill Johnson declined to comment as did an official from Mosaic Co.
BHP has raised $45-billion from a consortium of international banks to fund its offer, creating difficulties for a rival group to raise its own competing capital. However, with the exception of Toronto-Dominion Bank, Canada's 4 other big banks could be tapped to help fund a leveraged buyout offer along with deep-pocketed Chinese financial institutions in conjunction with other international banks.
To help fund an offer, the management buyout consortium could also sell Potash Corp's nitrogen and phosphate assets which analysts have said could be worth anywhere between $7-billion and $12-billion.