DayOnBay's  Instablog

A Canadian Dilemma?

For those who are not familiar with Potash Corp and BHP Billion’s current bid for the firm, here’s a Coles Notes version of the firms and their activity last month:

Potash Corporation of Saskatchewan is an integrated fertilizer company that operates potash mines in Saskatchewan and New Brunswick.  It is the world’s largest producer of potash and Canada’s sixth largest company, employing 6,000 Canadians.

BHP Billiton is a diversified mining “goliath” firm, based out of Australia. The largest company by market cap in Australia, and the biggest global mining company, the firm has been hit hard by the takeover bug. CEO Marius Kloppers, who failed to materialize a $66 billion dollar bid for mining rival Rio Tinto, has re-focused his efforts on Potash Corp.

On Tuesday, August 17^th, an unsolicited bid from BHP offered Potash shareholders $130 per share to acquire the firm. This implied a 16% premium but the bid was considered by management to “grossly undervalue” the firm. The offer, which amounted to $38.6 billion dollars, would be the largest deal in Canadian history and is currently the largest takeover deal on the table worldwide.

There are some things that Canadians feel very proud to own and, unfortunately, Potash Corporation of Saskatchewan, for most, does not make the list. Compared to Sidney Crosby’s epic goal this past February, the invention of insulin, the building of the Canadarm, or the global spread of the BlackBerry smartphone, the average Canadian feels no attachment to the firm. So, unless you are a shareholder of Potash Corporation or an employee, why should you care?

The impact of selling Canada’s sixth-largest company can and will affect many Canadians.  A sale of this size is always a dilemma, a double-edged sword for regulators and stakeholders. On the one hand, if a great offer comes along that maximizes shareholder value, we assume that it will be a good move. The hope, of course, is that provisions to maintain Canadian jobs and regulations will be honoured. And, to be fair, sometimes they are honoured and deals that have a “net positive” impact on the Canadian economy are completed.

However, this is a gamble. Most Canadian buy-outs follow the same, played out, sequence of events. (Insert name of foreign acquirer) promises to allocate more jobs and technology, help the local community, and to be better for the country than (insert target here) without cutting jobs. Especially in the case of troubled Canadian firms being rescued by international acquirers, these promises do sometimes materialize.

In response to the offer, the government assesses (insert name of acquirer) and applies a “net benefit” test as required under the Investment Canada Act. It almost always approves of the acquisition, leaving (Algoma Steel, Falconbridge, Dofasco, Hudson’s Bay Co., Cognos, Inco, etc) up for grabs.  In fact, since the Act’s inception, only one deal has been blocked, prohibiting Vancouver-based MacDonald Dettwiler from selling a division to an American firm in 2008. Approval of Inco by Vale SA and Falconbridge by Xstrata PLC were both granted under the condition of employment level guarantees. However, during the recession, neither firm kept its commitment driving Subury Inco workers to enter a year-long strike.

The major risk with this particular acquisition is the dissociation of Canpotex that will inevitably ensue. Capotex markets and protects the price of Potash in Canada. Without Potash Corp.’s participation in Capotex, the failure of the organization will mean Canada no longer has a say in Potash prices. Although undoubtedly BHP will promise that decisions on potash production will be made with Saskatchewan and Canada’s best interests in mind, ultimately the firm will become a small cog in the world’s largest mining machine, and history’s trend of large multinationals doing the “bare minimum” on Canadian soil will be once again tested.

Canada has very few truly world-class companies. Our schedule one banks, a handful of mining companies, and perhaps RIM, stand alone in this category. As a result, there are few industries where we have key global players, let alone the market leader. Whether or not the deal would have a net benefit for Canadians is difficult to ascertain. Ultimately, if you want to vote on the issue it will cost you, and today votes are selling at just under $155.