The Australian government blocked the sale of the Woodside Petroleum to Royal Dutch Shell in 2001. Woodside was, and still is, the country’s oil champion and serving it on a dish to foreigners would have been a crime against the national interest, or so the politicians argued. The year before, BHP and Billiton revealed their merger proposal. Fine, said the Aussie government; you two can get together, but the head office stays put. Today, BHP Billiton is run from Melbourne and the backwater address (by global standards) has not impeded its growth. It is the world’s biggest mining company by a long shot.
Australia is ostensibly an open-market economy. In truth, the Aussie government has used its foreign investment policies to strengthen its biggest and best companies, making them even bigger and better, to the point that they have become respected international competitors. To wit: BHP’s $38.6-billion (U.S.) bid for Postash Corp. of Saskatchewan, the world’s biggest fertilizer maker.
In other words, BHP and a few other Aussie biggies have benefited from policies – that is, protection from foreign takeovers and head office guarantees – that have been denied to Canadian companies. A foreign takeover of BHP, one that would shift its headquarters to London or New York, is unimaginable. Ditto Brazil’s Vale, which has used a string of acquisitions, among them Canada’s Inco, to become the world’s second-largest mining company with remarkable speed. Vale is 5.4 per cent owned by the Brazilian government, an equity sliver, or “golden share,” that allows the state to block its sale to non-Brazilian interests.
So should the Canadian government prevent BHP from scooping Potash Corp. into its voracious maw? Ignoring the fact that potash is a strategic, irreplaceable resource that prevents mass starvation, why should Canada allow companies that are actually or effectively takeover-proof to buy homegrown corporate hotties?
The free-marketers would argue that Canada is an open-market economy and should stick to its principles. Open markets lead to the most effective use of capital, and while the loss of a head office is undeniably bad, there is no sense protecting companies that are uncompetitive. If lame Canadian bosses can’t add value, let someone else do it, and don’t get your knickers in a twist if that someone comes from abroad.
The counterarguments are equally powerful, perhaps more so. If protecting companies from takeovers encourages slothful management and subpar value creation, how do you explain the success of Canada’s banks? Their 20 per cent ownership restriction makes them takeover proof, yet they emerged from the worst financial crisis since the Second World War in better shape than any of the other national banks.
Not all companies stalked by foreigners are the walking wounded in need of salvation. Potash Corp., supported by the potash marketing and sales company it sponsors, Canpotex, is undeniably a Canadian corporate champion. It is a dominant player in a global product whose importance can only rise as food demand climbs by 50 per cent within the next couple of decades. It is one of the few head offices between Toronto and Calgary with a global mandate. It is a valued investment option for pension funds. At one point, before the financial crisis, it was the top company on the Toronto stock market. And it’s about to be taken over by a company with no experience in potash, though one that may offer a fat premium to the $130 a share it has already pitched. In short, it’s hard to argue that the company is in need of a rescue.
Yes, BHP has promised Investment Canada that its Potash Corp. takeover would provide a “net benefit” to Canada. But the inward investment agency is about as effective as a toy gun. It has rejected only one foreign takeover in its 25-year history and obviously has a flexible interpretation of “net benefit.” Did Inco’s takeover by Vale provide help to Canada? How about the takeovers of Stelco (owned by U.S. Steel) or Dofasco (ArcelorMittal). Forget it. Each of them has become an ailing branch plant.
There is zero chance Investment Canada will send BHP packing, even though it’s hard to imagine that Potash Corp.’s takeover would actually help Canada, which is not to say it would hurt the country either. But if Investment Canada is going to approve takeovers automatically, the least it can do is employ the net benefits test more broadly and strategically, and make sure any promises made are monitored and enforced.
BHP has vowed to make Saskatoon its global potash headquarters. What does that mean? Most subsidiaries, regardless or their size, have no say in the company’s important financial, legal, human resources and financing decisions. That, in turn, means that the spinoff benefits, such as the use of local lenders, legal teams and the like, are nil to negative. Tax, or lack thereof, is another big consideration. Typically, foreign buyers load up their new foreign subsidiaries with debt, all the better to minimize the local tax hit. Is that what BHP has in mind for Potash Corp.? If Investment Canada isn’t asking that question, there’s something wrong. If it isn’t legally allowed to ask that question, there’s something even more wrong.
BHP may be a fine owner of Potash Corp. Then again, it may not. If Investment Canada won’t block the takeover of a company that doesn’t need taking over, it has to ensure “net benefit” means as much. BHP can afford to deliver what the agency demands. It’s just that its demands for the last quarter century have been laughable. As a result, Canada is turning into a branch plant, A Mari usque ad Mare.
