GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

THE POTASH DECISION: BHP Billiton and Potash Corporation of Saskatchewan

November 01, 2010 | About:
insider

Gordon Pape

16 followers
The state has no place in the boardrooms of the nation. - With apologies to Pierre Trudeau. In 1967, Mr. Trudeau, who was minister of justice at the time, made clear his aversion to government attempts to control what consenting adults do behind closed doors during a debate over the decriminalization of homosexuality when he said "the state has no place in the bedrooms of the nation".

Ideologically, you'd think that our current prime minister would be equally as opposed to the state dictating how directors should run their businesses and who should own them. But whatever his personal convictions, it appears they are about to be sacrificed on the alter of political expediency. If the buzz out of Ottawa is correct, the government will cave in to intense pressure from its Western Conservative brethren in Saskatchewan and Alberta and block the hostile takeover bid from BHP Billiton for Potash Corporation of Saskatchewan (TSX: NYSE: POT). Manitoba and Quebec also oppose the sale.

The message that a rejection would send to potential foreign investors in this country will be chilling. A Conservative government, supposedly a friend to business and a strong supporter of free enterprise and economic growth, will be widely castigated as unprincipled and unpredictable when it comes to foreign capital inflows. The decision could have negative implications for our long-term business and trade relations with the United States, Australia, the European Community, and rising economic powers such as India and China.

And to what end? There are no legitimate national security issues at stake. We're talking about potash, not uranium. The would-be buyer is based in Australia, not Iran. We're hearing a lot of noise about how the resource belongs to the people of Saskatchewan. Indeed it does, legally. All Potash Corp. owns is the right to extract it, and it pays the provincial government a hefty royalty for the privilege. What are we worried about? That BHP is going to cart off a 100-year supply of the stuff to Australia? Come on! The potash resources will stay in this country and will continue to be mined by Canadian workers.

When you strip away all the rhetoric, everything seems to boil down to money. The Saskatchewan government has come to the conclusion that it will lose billions of dollars in tax revenue if BHP succeeds. It's an argument that carries little weight. Governments have it in their power to adjust the taxation system any time they want. If Premier Brad Wall and his cabinet don't like what the outlook, they can change the rules. Giving BHP notice that they intend to do exactly that might make the company back off without the necessity of federal government intervention.

I have no love for BHP Billiton. It has become a colossus in the mining industry and throws its weight around accordingly. Its bid for Potash Corp. has been mismanaged from the outset and is a public relations disaster. The stingy, opportunistic offering price of US$130 a share was just the starting point. That has been followed by one gaffe after another, including the cavalier comment that as soon as the takeover was complete the company would opt out of its participation in Cantopex, the consortium that controls the marketing and distribution of Saskatchewan's potash and provides Canada with international clout in pricing decisions.

Then there was the incredibly patronizing tone of Andrew Mackenzie's Guest Opinion column in Friday's Globe and Mail Report on Business. He's the CEO of BHP Billiton's non-ferrous unit and the point man for the takeover bid. In the first paragraph he tells us how he has "spent a lot of time in Canada". He goes on: "I wouldn't be the first Scot to have grown fond of Canada, and I have felt first-hand the many parallels between my homeland, and Saskatchewan and Canada."

Does Mr. Mackenzie honestly think we're still at the "He likes us, he really likes us!" stage? Or that we even care? Surely he, or more likely his PR writer, can't be that naïve.

Not that any of this matters a hoot. All that seems to count is that Brad Wall has decided that he doesn't like Mr. Mackenzie or the offer he has brought to the table and that he has somehow won over Stephen Harper to his position.

That didn't look like the outcome a few days ago when Mr. Harper noted, correctly, that Potash Corp. is already majority-owned by U.S. investors and that CEO Bill Doyle spends most of his time in Chicago. An Australian company wants to buy a U.S. company. So what?

Now, thanks to Mr. Wall with support from fellow Conservative premier Ed Stelmach of Alberta, this has morphed into national identity issue. It is no such thing. It is hard ball politics, pure and simple, and Mr. Harper appears to fear that if he allows the deal to go ahead, the Western premiers will turn on him and cost him seats in next year's expected federal election. Shades of Newfoundland's Danny Williams!

The plain truth is that the BHP bid will fail even if the feds keep their hands off because the offered price is far too low. Events and the markets have passed BHP by. Unless the company is prepared to dramatically sweeten the offer - and it would probably take at least another US$30 a share to even tempt investors to tender - the bid will collapse. The cost of upping the ante by that amount would be almost US$9 billion, which would bring the total price tag for the acquisition to about US$47.6 billion. BHP could afford it but Potash Corp. starts to look pricey at that level and there's no guarantee investors would tender even at US$160. The third-quarter profit of $402.7 million ($1.32 a share) was up 60% from a year ago and beat analysts' expectations by a wide margin. The company expects to earn as much as $6 a share this year and between $8 and $8.75 in 2011. We're starting to hear talk that the shares could be back above $200 within 18 months, based on fundamentals.

In these circumstances, my view is that Ottawa should stand back and let market forces play out. Investors aren't stupid. It's clear the BHP offer is woefully inadequate and the price tag for pushing it to an acceptable level may be too much for even this giant to swallow.

Let's avoid the stigma that would come from closing the door to a multi-national corporation from a friendly country for no reason other than internal politics. Your initial reaction was right, Mr. Harper. Stick with it.

Footnote: Contributing editor Tom Slee advised selling Potash Corp. at C$157.06, US$149.67 right after the BHP bid was announced, saying that any price over US$130 amounted to pure speculation. The shares closed on Friday at C$147.50, US$145.09.

About the author:

Gordon Pape
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 4.8/5 (5 votes)

Comments

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK