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Canada's regulators are unlikely to stage much resistance to BHP Billiton Ltd.'s (BHP) bid for the country's fertilizer giant after an independent think-tank report highlighted the risks of a potential Chinese counterbid.
Some shareholders of Potash Corp. of Saskatchewan (POT), however, still need convincing to accept BHP's bid, though their hopes for a higher price have diminished as the report criticized the possible counterbid.
A report commissioned by Saskatchewan came out in support of a deal with BHP, especially in contrast to a transaction that would involve a state-controlled company such as China's Sinochem Corp. (600500.SH), saying such a deal could hurt prices of potash, a key mineral component of fertilizer.
Sinochem has explored the possibility of forming a coalition of buyers to make a counterbid to BHP's offer. It is now looking into the possibility of taking a minority stake in Potash Corp. that blocks the BHP bid, rather than pursuing a takeover, a person familiar with the situation told The Wall Street Journal.
Saskatchewan remains concerned about a projected hit to its annual revenue by C$200 million over the 10 years following a BHP takeover of Potash Corp., as BHP would be able to take advantage of development credits in the province's tax code. It is also opposed to BHP's plans to ultimately pull Potash Corp. out of a marketing arrangement with Saskatchewan's potash cartel, called Canpotex, fearing that move will hurt potash prices. The Conference Board of Canada's report downplayed the importance of Canpotex, saying it is "becoming increasingly redundant" as the potash industry has been consolidated into the hands of a few major companies.
Canadian Prime Minister Stephen Harper said the federal government will pay heed to the provincial government's concerns and block the $39 billion hostile bid if it doesn't provide a net benefit. Although Canada's provinces have autonomy over many economic matters, the right to veto a foreign investment lies in the hands of the federal government.
Canada has a track record of encouraging foreign investment. Of the 1,500 reviews undertaken by the Minister of Industry of large foreign investments between 1985 and 2008, only one deal has ever been blocked: the sale of MacDonald Dettwiler & Associates Ltd.'s (MDA.T) space division to U.S. defense firm Alliant Techsystems Inc. (ATK) in 2008.
Canadian officials understand that "selective protectionism ... has long-run potential costs that are really antithetical to Canada's interests," said Steven Globerman, a professor at Western Washington University in Bellingham, Wash., who authored a government-sponsored study of Canada's foreign-investment laws. "The federal government is aware of this. I don't think they're just going to roll over for the province and say, 'Okay, you don't want it so it's not going to be.'"
Potash Corp. disagreed with the think tank's report in a letter to shareholders Tuesday, saying Saskatchewan would lose more than the report's estimate of C$2 billion in tax revenue if the tie-up is consummated.
In a filing with U.S. regulators, Potash Corp. said the estimate is understated because the report assumed BHP wouldn't operate its potash mines at full production when prices drop. BHP has said it plans to produce as much potash as market prices will bear and not pull back production when prices fall as Canpotex does.
With a government veto of BHP's bid becoming an increasingly remote possibility, some Potash Corp. shareholders are softening their stance and becoming more open to the offer--but they continue to seek more money--while others remain staunchly opposed.
The offer to tender shares at US$130 expires on Nov. 18, and a BHP spokesman reiterated that it is the only one on the table. The spokesman declined to comment on whether the Anglo-Australian mining company would sweeten its bid.
Potash Corp. shares are trading above the bid price, a sign that investors still expect a better offer. Shares on Tuesday closed 0.7% lower at US$143.01 on the New York Stock Exchange.
Potash Corp. shareholder David Whetham, manager of the Scotia Resource Fund, said he opposes the current offer of US$130 a share, betting the increasing need for fertilizer to meet global food demands ensures in two to three years the stock will be trading above this level. He thinks a reasonable price is closer to US$150 a share.
But Potash Corp.'s third-largest holder, Stephen Jarislowsky of Jarislowsky Fraser Ltd., said that while he opposes BHP's bid because he believe it doesn't bring any benefit to Canada and because the price is too low, he may have to accept the offer.
"If it's a question of my taking $130 or $140 (a share) and if I don't do it and (Potash Corp.'s stock) goes back to $110--well, I have no choice, I have to do a fiduciary job for my clients," said Jarislowsky, whose firm owns close to 3% of the company.
Jarislowsky also doesn't see "how there could be much of a higher bid unless the shareholders vote against it." He said he doesn't see a rival bid from a Chinese company after the think-tank report's indication that a Chinese transaction could bring lower prices.
Saskatchewan is home to more than half of the world's known potash resources and about a third of global production.
-By Edward Welsch, Dow Jones Newswires; 403-229-9095; firstname.lastname@example.org
(Monica Gutshi in Toronto contributed to this article.)