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Kloppers knew of wild card when playing for Potash

By now we should all agree that Marius Kloppers did not make it to the corner office of the world's largest mining company at the age of 45 by being an idiot. And though his track record is relatively short - Friday marked his third anniversary as BHP Billiton's chief executive - there is a body of evidence that as a tactician, he's actually quite skilled.

So it stands to reason that Mr. Kloppers would not have lobbed a hostile takeover bid at Potash Corp. of Saskatchewan this summer if he believed he was merely setting the table for someone else - read: China - to come along and take it away. After all, BHP has long wanted to be a world-class producer of potash; it needs a major acquisition for that to happen; the biggest potential targets are in Russia and Canada but Russia won't let him buy one of the major producers. By process of elimination, owning Potash Corp. is one of the few ways - maybe the only way - for BHP to reach its goal quickly.

BHP has one shot to get it, and win it must. This was obvious long ago. The question, always, was timing. Common sense dictated that Mr. Kloppers should wait for the winning conditions to fall into place, to borrow an old phrase from Quebec sovereigntists. Commodity prices had to improve and so did the credit markets - but not so much that other mega-miners such as Rio Tinto would be inclined to play too. Check, check, check. But the wild card was always China and its $2.5-trillion (U.S.) in foreign exchange reserves. The Chinese government doesn't worry about what the bond market is up to. If it decides it wants something, money is not an object.

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The calculating Mr. Kloppers, therefore, must also have had a high degree of comfort that the Chinese would not swoop in to steal his prize. That was the most important winning condition of all. There is zero chance - none - that he didn't carefully anticipate, at length and probably with flowcharts, what China's likely response would be to a BHP offer for Potash. How could he be so confident? Our guess is he saw this: China can't buy Potash Corp. on its own. Not now. Five or 10 years from now, maybe. But the Chinese government is not open enough to foreign investment, and is not yet trusted enough by business leaders and politicians in the democratic world to be allowed to make a $40-billion takeover of a crucial resource (yes, even in malleable Canada).

Recall the uproar in Australia when Chinalco made a deal to take a major stake in Australian copper and iron ore assets (later aborted). Look at the furor over China's jailing of Rio Tinto officials and the Google censorship flap. A survey this year of business leaders by the American Chamber of Commerce in Shanghai found rising levels of mistrust and fear of protectionism; 38 per cent said they felt increasingly unwelcome to participate in the Chinese market. Therefore, China would need domestic partners. But Canadian pension funds don't participate much in large-scale resource takeovers and the only time they've dared to get involved in a takeover of this size (Ontario Teachers' bid for BCE), they were saved from disaster by a technicality. There aren't any Canadian mining companies large enough to front a bid because the largest ones have been taken over, except Barrick Gold, which is far more interesting in mining, um, gold.

Other foreign partnerships are equally fraught. The government of Russia would never allow a Saskatchewan companiy to take control of Uralkali or any other large Russian potash producer. Why would Canada allow the reverse - particularly after the unpleasant recent experience in Sudbury and Hamilton with the new foreign owners of Inco and Stelco?

A management-led buyout is a long shot. You're Potash Corp. CEO Bill Doyle. You've just turned 60 and you're richer than you ever dreamed. You can walk away with a few hundred million in your jeans. Or you can take on debt, recapitalize the company, and slug it out for years more, all the while hoping that potash prices don't collapse again and wipe out most of your fortune.

Any management buyout is likely to be complicated, and complexity rarely wins takeover battles. If it involves public shareholders keeping a stake (i.e., a partial takeover), it becomes an even harder sell. Remember that crazy three-way merger between Inco, Falconbridge and Phelps Dodge in 2006? It died because in the end, cash is still king.

BHP might still not get Potash Corp. It might run into a wall of opposition in Ottawa. But the odds of a Chinese counteroffer are sliding, as Marius Kloppers figured they would. Is that why Potash Corp. shares are sliding too? It sure is.

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