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A train car waits in line at Potash Corp.'s Cory mine near Saskatoon. (DAVID STOBBE/REUTERS)
A train car waits in line at Potash Corp.'s Cory mine near Saskatoon. (DAVID STOBBE/REUTERS)

Eric Reguly

Fading prospect of Chinese play for Potash Add to ...

Potash Corp. boss Bill Doyle, the Saskatchewan government and the few Canadian non-flatlanders who care about the deeply unglamorous, though critically important, world of fertilizer, take note. The Chinese are almost certainly not coming to the rescue, so get used to the idea of BHP Billiton dictating Canada's fertilizer agenda until the last shovelful of this precious resource is sprinkled on a crop nowhere near you.

BHP boss Marius Kloppers figured out that the chances of a rival offer would be slim even though the company attached a stingy premium to its $130 (U.S.) a share bid. What he knew is that consortium bids almost never work; a Chinese investment in Potash Corp. would have to be part of a group deal, making it a Hydra-headed beast.

He also knew that even if asset sales were used to strip Potash Corp. to its core, the price tag for the world's biggest fertilizer maker would be formidable. BHP didn't strive to become the top mining company for nothing. Through sheer, groaning bulk, this monster usually gets what it wants.

Various reports suggest Sinochem, China's oil-to-fertilizer colossus, is still plotting a run at Potash Corp. but that its desired partners aren't returning calls. No partners, no bid, end of story. The Canadian government would almost certainly send an all-Chinese bid packing. This week's report by the Conference Board of Canada, prepared for the Saskatchewan government, made it clear that the risks of state-ownership (i.e., Chinese) of Potash Corp. would outweigh those of BHP ownership.

For Sinochem to get in the game, it would probably have to limit itself to 30 per cent or so of the bidding group and recruit Canadian pension funds and private equity firms to make up the balance. The very notion of consortium bid is fraught with problems, ranging from cultural differences and potential conflicts of interest to deciding the nature of the exit strategy and who's responsible for canapés at directors' meetings.

In Potash Corp.'s case, diverse agendas would threaten the consortium from the onset. China's interest in potash is security of supply and low prices. The private equity investors would care not an iota about China's supply concerns. Their goal would be to maximize the potash price, all the better to make a quick, fat return and get out.

Consortium bids are indeed rare. Most die on the drawing table, while the success rate of the ones that do get cobbled together is poor. Last year Canada's Magna International, with Russia's Sberbank at its side, tried to buy Opel, the European auto division of General Motors. GM would have emerged as a minority investor in the new company, making it a three-partner bid. It went nowhere. In 2006, another hideously complicated three-way deal - the merger of Phelps Dodge, Inco and Falconbridge - imploded.

In Potash Corp.'s case, price is an equally formidable obstacle to a rival bidder.

Assume BHP's $130 a share offer rises to $150 (BHP, by the way, runs pricing models using that figure). That puts the equity value at $46-billion. It would cost about $4-billion to refinance Potash Corp.'s existing debt, taking the total hit to $50-billion - a crazy price, to be sure. Flinging more debt on Potash Corp.'s balance sheet would bring the price down. The company is capable of absorbing another $7-billion or so without losing its credit rating (just). That would drop the effective price to $43-billion.

Cutting into the company's flesh though the sale of the nitrogen assets, investments in public companies and the like would be the only way to drop the price again. Analysts have valued those assets at $16-billion or so, putting the theoretical cost of a stripped-down Potash Corp. at $26-billion. That's the absolute minimum amount of loot any owner of the company would have to come up with.

That's still a fortune and likely not an investment opportunity that would attract private equity, given the forecasts for decidedly gentle potash price increases. BHP probably has Potash Corp. in the bag. For investors, it's just a question of coaxing BHP to pay a higher premium. For Saskatchewan, it's convincing BHP to make employment, investment and royalty commitments that the province can live with.

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Follow on Twitter: @ereguly


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