String of broken promises by foreign investors make BHP bid a gamble for Canada

TORONTO - As Ottawa prepares to pass judgment on the largest takeover in Canadian history, critics and supporters are weighing whether the nearly US$40 bid for fertilizer giant PotashCorp will benefit Canada or continue a string of broken promises and job losses from recent deals.

"Why would you sell a company that owns a resource that is relatively limited worldwide whose value is only going to increase?" asked Don Newman, senior adviser for Bluesky Strategy Group.

"No other country would do that. We seem to just think that everything's for sale. And I think that's been a huge mistake," said the former CBC political correspondent.

If approved, BHP-Billiton's takeover of PotashCorp would put the former Saskatchewan Crown corporation under the control of the world's biggest miner and continue a consolidation trend that has seen most of Canada's steel and mining industries fall into foreign hands — with mixed results.

For example, the $19 billion takeover of nickel miner Inco four years ago led to lengthy strikes in Ontario and Labrador and job cuts in northern Ontario's nickel mines.

And the $1 billion acquisition of steelmaker Stelco landed U.S. Steel in court, facing a lawsuit by the federal government over the American steel giant's failure to meet jobs and production promises made to Investment Canada.

Meanwhile, Rio Tinto, which bought out Alcan in a US$38-billion friendly deal three years ago, has largely lived up to commitments for large capital investments, a charitable foundation and preservation of Montreal as headquarters of the international mining giant's aluminum division.

Swiss-based Xstrata PLC, which took over nickel miner Falconbridge Ltd. for C$24.8 billion four years ago recently announced it would open a new mine and create about 250 additional jobs in northwestern Quebec.

For the last quarter century, as foreign investment rules were opened up, the federal government has approved almost all foreign takeovers of Canadian companies.

Only one out of nearly 2,000 reviewed— a 2008 proposed takeover of MacDonald Dettwiler and Associates's information systems, satellite and space mission businesses to U.S. defence contractor Alliant Techsystems of Edina, Minn.— has been rejected.

That division of the company developed the Canadarm for the U.S. space shuttle program.

The troubled experiences of former iconic domestic corporations such as Stelco and Inco in foreign hands has prompted critics to demand stiffer investment screening rules from Ottawa.

But Jack Mintz, chair of public policy at the University of Calgary says broken promises and laid off workers aside, past foreign takeovers have been good for the country.

"People may have made promises not to lay off workers, and I'm sure they thought so when the price of ore was going through the roof," he said.

"Nobody was anticipating the financial crisis that came two years later, but how can you not have some layoffs?"

U.S. Steel has much deeper pockets than Stelco, which likely would have gone under by 2009 if it had not been bought out, he said. Likewise, Brazilian mining giant Vale injected funds that enabled Inco to develop Voisey's Bay, he added.

"That's what the takeover market's all about, somebody more efficient comes along and offers a price to shareholders because they believe they can create synergies or economic gains that wouldn't be there otherwise," he said.

The federal government is slated to decide Wednesday whether it will allow the $38.6 billion-bid for PotashCorp. to pass a test under the Investment Canada Act, which would turn the BHP-Billiton bid to PotashCorp shareholders for approval.

Reports this week said if Ottawa allows the deal to go through the Anglo-Australian miner would sweeten its bid by 10 per cent, making it worth about $43 billion.

Under the Investment Canada Act, the federal government makes its decisions based on whether the foreign takeover would bring a "net benefit'' to Canadian communities.

And while there is no concrete definition of "net benefit" some guidelines offered by the act include: the effect of the takeover on employment, productivity, competition and national policies.

BHP Billiton has pressed Ottawa on the merits of its bid and noted that the giant miner has operated in Canada for decades and owns the country's first diamond mine, the Ekati project in the Northwest Territories which employs about 800 people.

Critics of the deal include Saskatchewan Premier Brad Wall, Dick Evans, who was CEO of Alcan through its US$38-billion takeover by Rio Tinto in 2007 as well as the head of PotashCorp. Bill Doyle.

Mintz says if the government bows to critics and blocks the takeover, it will send a message that Canada is getting more protectionist and could even cause other countries to retaliate against potential Canadian takeovers.

But Newman says many other countries, including Australia—where BHP is headquartered, already have more stringent rules about taking over their companies.

"This idea that everybody's a great free trader and that we'd look like some kind of small time hicks, we'd just look like suckers," he said.

Newman says he's not against foreign takeovers of any Canadian companies, but natural resource miners, especially promising companies like PotashCorp who control a third of the world's potash supply, are a unique case that should be protected from foreign takeovers like Canadian banks and telecom operators.

For Newman, stringent regulations imposed on BHP wouldn't be enough because corporations focus solely on profits and when the economy takes a turn their primary obligation is to protect investors and capital at the expense of workers.

"When you try to put Canadian requirements and conditions into foreign sales it's very tricky," he said.

But Mintz says the involvement of one of the world's largest mining companies would pass the net benefit test because it will improve PotashCorp's productivity and drive higher provincial royalties.

"There tends to be a significant net benefit to the Canadian economy associated with foreign direct investment … because you're part of the major leagues as opposed to a smaller company."

He cited a Statistics Canada report that found foreign controlled companies have higher productivity pay higher wages and have more research and development than Canadian controlled companies.