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Dave Esslinger works at a Potash Corp. mine.


Sinochem Group is pulling back from attempts to launch a bid for Potash Corp. after talks with several investment groups, including the Canada Pension Plan Investment Board, fell through, according to sources close to the situation.

Representatives of the Chinese state-controlled chemical firm recently sought support from the CPPIB to join a potential consortium bid that would top BHP Billiton $38.6-billion (U.S.) hostile offer for the world's largest fertilizer company.

The Canadian pension fund was seeking a pledge from Sinochem that its investment in a Potash bid would provide a substantial annual return of about 20 per cent, according to sources familiar with the matter. The CPPIB was also seeking a bid that would not be highly leveraged and would include Canadian control of the Potash Corp. board. Those terms were too onerous for Sinochem.

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"The Chinese went away from the discussions disappointed," said a source close to the talks.

Sinochem has also been seeking assurances from the highest levels of the Canadian government that a Chinese-led bid to rival BHP's unsolicited offer would be fairly considered by federal regulators. However, Ottawa hasn't given the Chinese a signal that it would not reject a proposed takeover of a major Canadian resource company by a state-owned-enterprise.

Without an agreement from the CPPIB and Ottawa's assurances, Sinochem is now decelerating its efforts to mount an offer for Potash, which had been considered the Saskatoon company's best chance for a viable alternative to BHP's bid. One source said it has been "pens down," on the Sinochem file for some time.

Transport Minister Chuck Strahl suggested this week that Canada cannot provide assurances to a bidder until a bid is finalized and official, and Sinochem had not reached that point.

"Until you have a deal that you can review, it's a theoretical discussion," he said in Beijing. "There's a bid from Australia out there, that one we know about. But if there's another bid, it has to be developed. … that as far as I know hasn't been done...

"You can't evaluate a theoretical discussion, it has to be a very specific proposal."

With access to considerable capital and a goal of investing in a commodity for which demand is rising as China's population adds more meat to its diet, a bid led by Sinochem has been seen as the best hope for Potash and its chief executive officer, Bill Doyle. In a recent interview with The Globe and Mail, Mr. Doyle predicted that BHP's bid would not go unchallenged.

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Sinochem hired investment banks Citigroup and Deutsche Bank to advise on a possible offer. But amid the political uncertainty and Potash's aversion to BHP's bid, it has retreated, a source close to the situation said.

"The Chinese were attuned to the political risks and don't like to get involved in hostile situations," the source said.

Potash Corp. has rejected BHP's $130-a-share offer as too low, but will be hard pressed to come up with a viable alternative that would provide shareholders more value than BHP's bid now that Sinochem's interest has waned.

One alternative the Saskatoon fertilizer company is working on is a breakup of Potash Corp.'s assets that would see the sale of the firm's nitrogen and phosphate business, the addition of debt to the balance sheet and a special dividend payment to shareholders of $70 a share. At least one Canadian pension fund has held talks with Potash Corp. regarding such a scenario, according to a source.

A special dividend that high would cost almost $21-billion and analysts and investors have put a low probability on this scenario, because taking on so much debt would jeopardize Potash Corp.'s credit rating.

With files from reporter Tara Perkins in Beijing

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