The Takeover Attempt of Potash Corporation of Saskatchewan

In August 2010, Australian-based BHP Billiton made a $38.6 billion takeover bid for Potash Corporation of Saskatchewan (PCS). As part of the deal, BHP initially said it would drop out of the Canpotex marketing cartel and would take a more free market approach to selling potash (i.e., it would sell directly to customers rather than going through Canpotex). BHP's offer of US$130 per share was immediately rejected by PCS as insufficient, and the CEO of PCS, Bill Doyle, said that other investors were likely to make better offers. By mid-September 2010, PCS shares were selling for $147 in New York. This suggested that investors thought a higher offer was eventually going to be made.

If PCS is bought out, top executives and board members of PCS could receive as much as $700 million in option profits, stock proceeds, and severance payments. For example, CEO Bill Doyle could get about $400 million and Chief Financial Officer Wayne Brownlee more than $100 million. Stephen Jarislowsky, the head of Jarislowsky Fraser Ltd., said those numbers were "obscene" because the executives are benefiting from the increasing price of potash, not because of any brilliant strategic decisions they had made.

The sale of PCS is a big deal for Saskatchewan because the province gets large royalty revenues (and income tax payments) from PCS. The amount varies a lot, depending on the price of potash. The province normally receives somewhere between $200 million and $500 million each year, but in 2008 the government got $1.36 billion because potash prices had soared. But then potash prices dropped, and in 2010, the government expects to get just $221 million. Potash sold for about US$150 a tonne in 2000, then increased to $700 a tonne by 2008. More recently, prices have declined to about $340 per tonne.

One concern is BHP's stated intention to operate the potash mines at full capacity. That would increase supply and likely drive prices down, and that, in turn, would reduce the royalty payments that Saskatchewan receives. BHP's argument that more output will give the province more income is therefore somewhat dubious. The government might actually get less revenue if the price of potash really drops. The obvious solution is to change the royalty structure so the province is not negatively affected if the price of potash drops.

Marius Kloppers, the CEO of BHP, said that running the potash mines at full capacity will mean more jobs for Saskatchewan workers and more cash flowing into the local economy. The PCS mines have been running at just over 50 percent of capacity in recent years, and union leaders like the idea of more employment. But they are concerned that increasing output could force potash prices lower and hurt workers at other potash production companies like Agrium and Mosaic who also have mines in Saskatchewan. BHP says that going to full production would likely drive some marginal foreign competitors out of the market and lead to more stable prices in the long run. Potash is relatively easy to mine in Saskatchewan, and the province may have a 20 percent lower cost structure than some of its foreign competitors.

Saskatchewan Premier Brad Wall said the province could lose up to $100 million in corporate income tax if BHP writes off the interest it has to pay to finance the takeover. The loss of that money is one of the reasons that Saskatchewan is opposed to the deal. Actually, the province can't veto the deal on its own; it can, however, recommend to Ottawa that the federal government reject the deal on the grounds that it does not provide a "net benefit" to Canada. The takeover must be approved by Industry Canada (through the Investment Canada Act, which says a foreign takeover would have to be a net benefit to Canada). The federal government launched a review of the proposed takeover, and Saskatchewan hired the Conference Board of Canada to do an analysis of the proposed takeover. It will combine that analysis with the deliberations of its own internal task force in making recommendations to Ottawa.

In September 2007, PCS filed a lawsuit claiming that BHP was trying to drive down the price of potash so it could gain control of PCS at a "lowball" price. The lawsuit demanded that BHP hand over large amounts of data showing how it decided to get into the potash business. BHP then asked a U.S. court to reject the legitimacy of the lawsuit and said PCS's demand for information was a "fishing expedition" and was "unreasonably burdensome." BHP also said that the allegation they were trying to drive down the price of potash was ridiculous because BHP would have no guarantee that such a strategy would work.

A potential second bidder is China's state-owned Sinochem. China is the world's largest market for potash, and the Chinese government is concerned that BHP will become too powerful in world markets if it succeeds in its takeover of PCS. BHP has already succeeded in changing pricing structures for iron and coal. But BHP disputes China's concerns, and says that Canada should watch out for a state-owned foreign company taking over PCS because China would try to drive the price down so it could buy potash very cheaply. The province of Saskatchewan therefore has a dilemma: both takeover possibilities may be detrimental to the province.

One alternative is for the province of Saskatchewan to assemble a Chinese-led consortium to come up with a better offer. The group would be composed of a Chinese resource company, other international sovereign wealth funds and perhaps Canadian financial players like pension funds. This approach might be palatable for the federal government.

On November 4, 2010 Industry Minister Tony Clement announced that the federal government was rejecting BHP's offer on the grounds that it did not provide a net benefit to Canada. But he also gave BHP 30 days to improve its offer. Clement also said that Canada remains open to foreign investment that provides a net benefit to Canada. The CEO of BHP, Marius Kloppers, was said to be shocked at the decision.

Questions for Discussion

1. What is the difference between a merger and an acquisition? A hostile takeover and a friendly takeover? A strategic alliance and a merger? How do these terms apply in the potash case?
2. Consider the following statement: The federal government of Canada should not intervene when foreign companies attempt to buy out Canadian companies. This type of action by government interferes with normal free enterprise activity and leads to various problems, including inefficiencies in the way companies are run. Do you agree or disagree with this statement? Defend you answer.
3. While rejecting the BHP takeover attempt, Industry Minister Clement did give BHP 30 days to make a better offer. Did BHP make a better offer? Did a different company or consortium of companies make an offer?

Sources: Craig Wong, "Feds Bury Potash Deal," Winnipeg Free Press, November 4, 2010, p. B5; Eric Reguly, "Potash Decision Surprised BHP," Business News Network, www.bnn.ca/News/2010/11/4/Potash-decision-surprised-BHP.aspx; Brenda Bouw, "Wall Warns of Huge Cost for BHP Deal," The Globe and Mail, October 1, 2010, p. B4; David Milstead, "Sale of Potash Corp. Would Reap Huge Payouts for Executives, Board," The Globe and Mail, October 1, 2010, p. B1; Boyd Erman, "BHP Win is a Paycheque-Hungry Miner's Dream," The Globe and Mail, September 28, 2010, p. B2; Brenda Bouw, "BHP Says Potash Suit a 'Fishing Expedition,'" The Globe and Mail, September 27, 2010, p. B1; Brenda Bouw and Shawn McCarthy, "Potash Takes BHP to Court to Block Bid," The Globe and Mail, September 23, 2010, p. B1; Andy Hoffman and Brenda Bouw, "A Chinese-Controlled Potash Would Cost Canada, BHP Warns," The Globe and Mail, September 22, 2010, p. B1; Brenda Bouw, "BHP Finalizes Loans to Back Potash Corp. Takeover," The Globe and Mail, September 18, 2010, p. B8; Andy Hoffman, Brenda Bouw, and Mark Mackinnon, "Potash Brass, China in Talks on Rival Bid," The Globe and Mail, September 16, 2010, p. B1; Brenda Bouw and Andy Hoffman, "Saskatchewan to BHP: Stay in the Cartel if you Want Our Support," The Globe and Mail, September 9, 2010, p. B1; Brenda Bouw and Andy Hoffman, "A White Knight is on the Way, Potash CEO Insists," The Globe and Mail, September 8, 2010, p. B1; Richard Blackwell, "Explainer/Saskatchewan's Potash Royalty," The Globe and Mail, September 3, 2010, p. B3; Brenda Bouw and Andy Hoffman, "Saskatchewan Fires Warning at State-Owned Potash Suitors," The Globe and Mail, September 2, 2010, p. B1; Eric Reguly, "In the Battle for Potash Corp., Domestic Heroes are in Short Supply," The Globe and Mail, September 2, 2010, p. B2.