HONG KONG — The hostile takeover bid by Australia’s BHP Billiton for Potash Corp. of Saskatchewan, Canada, is worthy of a case study by Harvard Business Review, but it is also a fascinating example of the adventures and misadventures, opportunities, and considerable failings of global capitalism at work, especially as they involve China Inc.
From early last year, there had been rumors that the Australian mining giant had Potash in its sights. So it should not have been a surprise — except perhaps in that it took so long — when BHP last month launched a $130 a share bid totaling $39 billion for the Canadian company. It was brilliantly opportunistic. BHP’s offer was way above the languishing Potash shares, which hit a 52-week low of $88.68 in July, but soared toward $150 after the BHP offer.
BHP cleverly bid when potential rivals, notably Rio Tinto and Vale of Brazil, were preoccupied. World potash prices were at lows of $400 a ton in the second quarter, though they are expected to rise rapidly on fears of shortfalls in global food production. (This, incidentally, says little for so-called value investors: Shares of Potash were so low that investors had to wait for BHP to wake them up to the potential.)
Potash is the world’s biggest producer of the product, accounting for about 23 percent of global supply. It is also an important producer of nitrogen (2 percent of global supplies) and of phosphates (6 percent of the world’s supplies), which with potash are the main nutrients in producing fertilizer. China takes about 7 percent of Potash’s output. China and India are the biggest potash importers.
It is an open secret that Beijing is trying to find allies to put together a rival bid to prevent from BHP walking away with the prize. China Inc. was working through Sinochem — logical because Potash itself already owns 22 percent of Sinochem’s fertilizer subsidiary, Sinofert Holdings. Sinochem has retained HSBC to advise it on options regarding Potash.
Chinese investors also approached Canadian pension funds to try to put together a joint deal that would trump BHP’s offer. One problem is that $39 billion (or more) is not small change for most companies, and even big pension funds would hesitate to commit so much to buy a single company.
Hopu Investment Management, a Chinese private equity fund with backing from Singapore’s Temasek Holdings, may also approach Canadian investors and Middle Eastern sovereign wealth funds about making a counter bid.
Some Beijing officials even want to launch an antimonopoly investigation of BHP. There is a long history of suspicion between China and the Australian mining giant that runs through terse iron-ore price negotiations and China’s efforts to derail BHP’s takeover of Rio Tinto.
BHP and other industry experts say a successful BHP takeover would be more likely to lead to higher production and lower prices. Potash isn’t traded on the open market, but prices are set by negotiations between cartels, such as the Canadian-U.S. Canpotex consortium, which includes Potash and other North American producers Agrium and Mosaic Co., and major buyers such as India, China and Brazil.
BHP said that, if successful, it would take Potash out of Canpotex, and explore moving to a spot pricing system. Other industry specialists have said that BHP would probably increase production to meet rising demand for fertilizer in food production, and this would at least take the edge off rising prices.
After reaching highs in 2008 of almost $1,000 a ton, potash prices slumped as farmers skimped on fertilizers. Predictions are that potash prices will go to $550 a ton or maybe higher in the next year as fears grow about global food problems exacerbated by floods in Pakistan and fires in Russia.
The bid for Potash Corp. has complicated commercial and political ramifications, not least because the company was originally founded in 1975 by the government of Saskatchewan, and later privatized. There is a strong feeling locally that the resources should belong to the people, since the Saskatchewan government gets a substantial chunk of its budget from potash royalties, which are based on prices not on production. In 2008, these accounted for 15 percent of the provincial budget, but fell with the potash price this year to about 2 percent.
Brad Wall, the premier of Saskatchewan has already discarded his free-enterprise cloak and declared that “the potash does not belong to Potash Corp. or Mosaic or Atrium, and neither will it belong to BHP Billiton. It belongs to the people of the province.” Saskatchewan has powers over licenses for mining the potash and Wall added that he is looking at how it might be able to use them.
Canada has learned by direct experience that bigger is not necessarily better when it is the junior player in a foreign takeover. U.S. Steel’s takeover of Canada’s Stelco came with promises to maintain both production and employment. But in the face of “Buy American” requirements in the U.S. stimulus package, U.S. Steel shut Stelco’s plants.
Too often, from steel plants down to humble chocolate-making, bigger turns out not to be better for the party taken over, though by that time the shareholders have walked away with a big pile of winnings. Even so, Canadian pension funds might cash in if BHP increases its offer. But BHP, above all, should understand the nationalist sentiment about control of rich mineral and other natural resources. Australians are not happy when foreigners try to take over what they see as their assets.
For China, it must seem that the capitalist game is not a fair one, especially when it comes to what to do with its pile of reserves hard-earned from selling its goods successfully to the world. Leaving them in U.S. dollars is potentially a losing proposition. Putting billions into U.S. financial firms proved not to be a good deal. Beijing has not gone the Japanese way of trying to buy the Great American Dream with purchases of real estate and Hollywood.
Indeed, trying to secure raw materials for its economic future through deals in Africa, Latin America, Asia, Australia and now potentially Canada might seem a much more useful thing to do with its $2.5 trillion reserves. But it has met howls of protest all round, as again in Saskatchewan. By a 60-40 edge, Canadians said they are prepared to buy the BHP-Potash deal, but China is a different matter. The most logical reason for hostility is the perception that China, as a foreign government, is different from BHP, as a foreign company.
Beijing might be better advised to ensure that its economic growth goes to the benefit of its own people — not to building foreign exchange reserves that are a wasting asset.
Kevin Rafferty is editor in chief of Plain Words Media, a group of journalists specializing in economic development issues.