Harper Weighs BHP Rejection After 1,637 Canada Deals Approved

Canada has approved 1,637 corporate takeovers since 1985 and rejected one. Prime Minister Stephen Harper must decide this week whether to refuse a second.

The Conservative government is examining BHP Billiton Ltd.’s $40 billion hostile bid for Potash Corp. of Saskatchewan Inc. and faces pressure from provincial politicians to block it. The federal review, which has a Nov. 3 deadline, must weigh the government’s policy of attracting foreign investment against the opposition stirred up by the proposed deal.

“If you kill the bid, you’re going to see Canadian companies penalized when they try to buy companies abroad,” said Sadiq Adatia, who oversees about C$12 billion （$11.8 billion） of assets, including Potash Corp. shares, as chief investment officer at Russell Investments Canada in Toronto. “This isn’t a one-deal decision.”

Resistance to the proposal from Melbourne-based BHP, the world’s largest mining company, is coming from Saskatchewan, where Harper may risk losing parliamentary seats over the issue. The province accounts for 30 percent of global production of potash, a crop nutrient, and is home to five of Saskatoon-based Potash Corp.’s six main potash operations. Quebec, Alberta, Manitoba and federal opposition lawmakers are also objecting.

“It’s fairly unusual to have a provincial government being so vociferous in opposition,” said Sandra Walker, a lawyer with Fraser Milner Casgrain in Toronto who specializes in approvals from foreign investment and competition regulators. “It’s a tough one to call.”

Elusive Majority

Saskatchewan Premier Brad Wall has campaigned for Industry Minister Tony Clement to reject the acquisition under the Investment Canada process, saying it will cut the province’s revenue and because potash is a strategic resource. Potash Corp., the world’s biggest producer of its namesake fertilizer, has 2,103 employees in Saskatchewan.

The Conservatives hold 13 of 14 electoral districts in Saskatchewan and any loss there would take Harper further away from a parliamentary majority, which has eluded him twice before. The party holds 142 of the 308 seats in the House of Commons, 12 short of a majority. An election can be triggered if Harper decides to call one, or if he’s defeated in a non- confidence vote.

“The politics of this -- remember that we’re always in a pre-election phase -- make it very difficult for the government to disagree with a popular premier,” John Manley, the head of the Canadian Council of Chief Executives and who was industry minister from 1993 to 2000, said in an interview.

Additional Concessions?

There’s a 30 percent chance BHP’s bid will be approved, Manley said. Additional concessions won’t satisfy Wall because the premier wants to keep control of the resource, he said. Should the government block the offer, it will “ring-fence” the decision by explaining that it’s a unique case, he said.

BHP says it will make Saskatchewan home to its head office for potash operations, continue developing its Jansen potash project in the province, maintain current employment levels and propose a Canadian nominee for election to its board. The company has taken out full-page advertisements in newspapers saying: “We Keep Our Promises.”

Potash Corp. has rejected the $130-a-share offer as too low and said it’s seeking other bids. The shares rose $2.56, or 1.8 percent, to $145.09 on the New York Stock Exchange on Oct. 29. They have advanced 29 percent since Aug. 16, the day before the company first disclosed BHP’s approach.

‘Political Question’

Potash Corp. said Oct. 28 its third-quarter net income was $402.7 million on sales of $1.58 billion. BHP’s net income was $12.7 billion on sales of $52.8 billion in the fiscal year ended June 30.

Should it proceed, the Potash Corp. deal would be the largest takeover of a Canadian company after Vivendi SA’s $46.1 billion purchase of distiller Seagram Co. Ltd in 2000, according to data compiled by Bloomberg.

Some of Canada’s largest natural-resource companies have been purchased by foreign acquirers in the past decade. In 2006, Switzerland’s Xstrata Plc made a successful hostile bid for nickel producer Falconbridge Ltd. while Brazil’s Vale SA agreed to buy Toronto-based miner Inco Ltd. London-based Rio Tinto Group agreed to acquire aluminum producer Alcan Inc. in 2007.

The review of BHP’s bid “is a political question,” Mark Nicholson, a lawyer with Cassels Brock & Blackwell in Toronto, said in a telephone interview. “Looking at it from the legal analysis and based on the past, it should go through.”

American-Controlled

Harper told lawmakers Oct. 20 that the bid is a “proposal for an American-controlled company to be taken over by an Australian-controlled company,” as foreign shareholders own 51 percent of Potash Corp. and the company has moved some head- office jobs to Chicago.

He was sending “pretty strong signals that the government isn’t going to oppose this,” said Gar Knutson, an Ottawa-based government-relations lawyer with Borden Ladner Gervais and a former minister of state for international trade. “There may be some negotiations to allow it to go ahead more easily, but at the end of the day it will be approved.”

Under the Investment Canada Act, the government can block any transaction valued at C$299 million or more if it finds the deal doesn’t provide “net benefits” to the country, based on factors such as economic activity, employment and productivity. Canada has reviewed and approved 1,637 applications under the act between June 30, 1985, the year the legislation was enacted, and Sept. 30 this year, according to government data.

Open Markets

The bid by Minneapolis-based Alliant Techsystems Inc. for MacDonald Dettwiler & Associates Ltd.’s space business in 2008 was the only takeover formally rejected in the period.

Potash Corp. is “seen as a Canadian champion and as a result it has political connotations to it that other issues wouldn’t have,” Canadian Chamber of Commerce President Perrin Beatty said in an interview.

The government’s “predisposition will be to have open markets and to encourage investment, and the proponents of blocking the sale are going to have to demonstrate that there is a transcending national interest,” said Beatty, a former cabinet minister under Progressive Conservative Prime Ministers Joe Clark and Brian Mulroney between 1979 and 1993.

Saskatchewan Energy and Resources Minister Bill Boyd has expressed concerns that BHP might break up Canpotex Ltd., the fertilizer marketing company jointly owned by Potash Corp., Mosaic Co. and Agrium Inc. Because of its royalty formula, the province, which has a population of one million, would stand to lose C$3 billion if BHP increases production and lowers potash prices, he says.

Janice MacKinnon, a former Saskatchewan finance minister, said she sees a 60 percent probability Harper will block the acquisition. He will lose parliamentary seats in Saskatchewan if he approves the deal, she said.

“It’s going to be very difficult for him to say, the province owns the resource, the province thinks this, but I’m going to overturn the province and I’m going to accept the political fallout,” said MacKinnon, who is now a professor at the University of Saskatchewan.