Potash-BHP Billiton Deal: Games (Canadian) People Play

Includes: BHP, POT
by: Mark McQueen

News item: Investment Canada favours takeover bid for Potash Corp.

Well, I guess that’s that. We momentarily puffed out our chests, only to quickly decide that we were only to happy to allow Austrailia’s BHP Billiton (NYSE:BHP) to do a deal here that our Commonwealth cousins would never permit in their own backyard.

Last week, Ottawa was “wary” of BHP’s takeover of Potash Corp. (NYSE:POT), according to my morning Globe (see prior post “Playing with political fire on Potash file” Oct 28-10); great news, and seemed like reason enough to go short the deal. Senior Ottawa types wouldn’t put that stuff into the marketplace purely in an effort to win more concessions out of BHP; that’d be “playing with political fire”, or so I thought.

Over the course of Thursday’s trading, the market got a bit weary of Saskatchewan Premier Brad Wall’s efforts, and particularly the “wary” angle out of Ottawa. Stock sold off 2-3% at various points during the day. In the House of Commons, the Prime Minister walked the line:

Let me assure you that when we announce this decision, the criteria will be clear and the decision will be taken in the best long-term interests of the Canadian economy.

Which sounds neither wary nor unwary. But, the market took it well. By Friday, oddsmakers were back to assuming that Canada would approve the deal, just like all but one of the prior 1,638 Investment Canada reviews (hat tip Bloomberg). Shawn McCarthy’s story yesterday sent Potash shares even higher (with some help from a U.K. news report about BHP increasing its $130/share bid), with the unfortunate news that Investment Canada “negotiations had wrapped up over the weekend.”

Huh? Wrapping up sounds a lot like “successfully concluded”. What happened to the brave yet “wary” Ottawa decision-makers between Wednesday’s interview and the weekend negotiating session? Things got worse this morning, with the new story in the Globe announcing that “Investment Canada favours takeover bid for Potash Corp.“.

Which means that “wary” interview/leak from last week was merely a negotiating tactic in an effort to extract a little more out of BHP. Like the ludicrous notion that some independent arbiter (a former Saskatchewan judge or retired Premier) is going to monitor compliance with the “net benefit” test following the Potash acquisition.

Isn’t that the federal government’s job?

But, as many anticipated, the official Ottawa leakers of last Wednesday were doing just what I deduced they wouldn’t do, given the high stakes nature of the strategy. Unfortunately, it appears they really were playing with political fire. Raising the temperature with no particular endgame, other than squeezing a little more juice from the BHP lemon. Dumb, dumb, dumb.

Ottawa might well be wary of the takeover. People around Industry Minister Tony Clement may even rather that it not happen. You might even suspect that the Minister himself would prefer that this all just went away; quietly. But the Investment Canada officials didn’t get the memo, and are kicking the problem over to their boss, and his.

The spurious victory negotiated by our public servants, according to the Globe report, is that:

[The BHP bid] would come with legally enforceable commitments to boosting jobs and investment in the country, and would establish an independent watchdog with the power to monitor company promises and impose penalties.

If I’m not mistaken, U.S. Steel (NYSE:X) also had legally-enforceable commitments to maintain employment at the Stelco steel mill, improve the plant, and keep the business operational. Last I checked, Stelco isn’t operating and Minister Clement was suing U.S. Steel for non-performance under the Investment Canada Act. I don’t see how the presence of an “independent monitor” would have averted that, although I suspect that it would definitely appeal to the likes of U.S. Steel and BHP.

By “favouring” the deal, Investment Canada has put the Prime Minister in an impossible situation. If he approves their recommendation, Canada will forever look naive on the international stage. If he turns it down, he’ll be accused of playing politics by the very people in the House of Commons who — in their hearts — wanted him to turn the deal down.

Disclosure: I own POT puts

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