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(Geoff Howe/© 2010 Bloomberg Finance LP)
(Geoff Howe/© 2010 Bloomberg Finance LP)

Eric Reguly

The real story behind Ottawa's Potash rejection Add to ...

BHP $39-billion (U.S.) bid for Potash Corp. is unofficially dead. Ottawa's rejection of the offer has triggered a flurry of half truths, outright falsehoods and general hysteria from the usual political, business and media quarters. Herewith are some of the myths, and my responses to them.

Ottawa's (tentative) rejection of the deal sucks because BHP was making a big, fat "investment" in Canada

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No investment is created equally. The best investments are the ones that bring fresh capital, and fresh thinking, to the deal. In this case, BHP's proposal to buy Potash Corp. was not an investment per se; it was merely substituting one bucket of capital (BHP's) for another (Potash Corp.'s). The Canadian company doesn't need BHP's capital any more than Potash Corp. boss Bill Doyle needs to stuff another $100-million into his holiday fund. Potash Corp. has never had any trouble raising capital; no company with a killer product and a decent business plan does. It became the top fertilizer player on the planet all by itself and ownership by BHP would not necessarily accelerate its growth plans; on the contrary, it might slow them down because BHP has zero fertilizer experience or working fertilizer assets, meaning it could not offer management expertise or synergies. BHP does have a vast potash property in Saskatchewan called Jansen, which it may or may not develop. Building the mine would require $12-billion of spending. Now that would be a genuine - and welcome - investment.

Canada is "closed for business" because Ottawa sent BHP packing

Almost every country in the world has some sort of foreign investment review system, ranging from a proper screening agency to a prime minister or dictator who can stop a deal with the same intellectual rigour as ordering a bottle of champagne. The United States prevented a Chinese takeover of California oil giant Unocal and a political backlash forced Dubai World to sell its P&O ports to an American buyer. In Australia, BHP's home country, the government blocked the sale to foreigners of two big resources companies, Woodside Petroleum and Oz Minerals. It is all but certain to reject the Singapore Stock Exchange's $8.2-billion offer for Australian Stock Exchange (speaking of which, it's just a matter of time before someone goes after TMX Group, owner of the Toronto Stock Exchange, so the feds better figure out soon whether the bourse is a strategic national asset that needs a moat dug around it). Canada has rejected precisely two foreign takeover attempts of the 1,600 or so made in the past quarter century, with Potash Corp. being the second. Australia, one of the world's strongest economies, hasn't suffered because of its occasional foreign investment flap. Neither will Canada.

The cynical feds were making policy "on the fly" because they were in a panic about losing Prairie votes

Well, maybe. You could argue that the BHP offer would have been rubber-stamped if Stephen Harper & Co. had had a majority in the Commons and weren't facing an election. You could argue equally convincingly that BHP's ownership of Potash Corp. would be unambiguously bad for Canada and that the government was compelled to turn it down. To foreign companies, dealing with Investment Canada must seem like a simple box-checking exercise (or must have before BHP tripped up). Employment guarantees, check. Spending on R&D and local procurement, and guaranteeing the survival of the head office, check, check, check. But "net benefit" isn't just about those items. It's also about not ripping a hole in provincial budgets. Saskatchewan faced losing billions in revenue because of perfectly legal tax and royalty avoidance under the BHP ownership scenario, and possibly declining potash prices because of its vow to dismantle Canpotex, the international potash marketing and sales cartel that Potash Corp. sponsors. The missing bucks duly sent Saskatchewan Premier Brad Wall into a tizzy and he lobbied the feds to kill the deal. Destabilizing an entire province's finances is not a net benefit for Saskatchewan or Canada.

Potash Corp. can relax now that BHP's offer fell apart

Forget it. Point one is that CEO Doyle has repeatedly said the shares are worth $170-plus. They're trading at about $141, so fertilizer boy has a big gap to fill. Investors would like to know how he's going to do it. Point two is that what is good for Potash Corp. - rising potash prices and agriculture markets - is also good for the company's ambitious competitors in Russia, Belarus and elsewhere. As prices rise, competing mines will open and mighty Potash Corp., which controls about 30 per cent of world supply, could in time see its market share fall by half, or worse, damaging the company's pricing power. Mr. Doyle's job is to prevent that from happening, but will he?

Editor's Note: An earlier online version of this story incorrectly stated that the United States prevented a Chinese takeover of California oil giant Chevron. This online version has been corrected.

 

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