September 5, 2010
According to Reuters, Chinese state officials have ordered state companies to meet with investment bankers to explore options to potentially block BHP’s $39 billion hostile bid for Potash Corp.
Late last week Reuters reported:
“In response to the directive, Sinochem is holding meetings with several banks, the source said on Friday, including Citigroup, HSBC and Morgan Stanley.
The order from Beijing underscores the seriousness with which China is taking the potential BHP-Potash tie up and its implications for the pricing and supply of the crop nutrient, despite obstacles to launching a successful counter-bid.
‘They are being instructed,’ the source said, adding the order was issued late last week. ‘The chairman of Sinochem has been asked to speak to other banks.’
A Wall Street Journal report on Thursday said Sinochem had hired HSBC to advise on options pertaining to Potash Corp.
One option being discussed is the possibility of Sinochem linking with China’s $300 billion sovereign wealth fund CIC, according to a second banking source familiar with the matter.
The most likely scenario is that China will consider buying a blocking stake, rather than attempt a complete takeover of Potash Corp, said both sources who were not authorized to speak publicly due to the sensitive nature of the discussions.
Assuming a consortium pays a 20 percent premium to Potash’s market price, a 15 percent stake would cost about $8.3 billion.”
Options for Chinese firms include launching a competing hostile bid for Potash Corp., acquiring a blocking stake in Potash Corp. or using Canada’s foreign investment rules to oppose the transaction. Such grounds may include arguments that the investment would not be of “net benefit” to Canada or, likely more remotely, that the investment threatens Canada’s national security (though it is difficult to see how potash could have any national security implications).
It seems rather doubtful, however, that strategies not involving competing acquisitions would be successful, particularly given BHP’s apparent willingness to provide satisfactory commitments (i.e., undertakings) in connection with the transaction and the difficulty of seeing how control of potash could be key to Canada’s national security. It seems even less likely, despite the recent Government proceedings against U.S. Steel (for allegedly failing to comply with its undertaking in connection with its acquisition of Stelco), that the current Conservative Government would oppose the transaction, particularly given that Canada’s foreign investment law regime was liberally amended last year as part of sweeping amendments to the Investment Canada Act to encourage more foreign investment and bring Canada in line with its other major trading partners.
As a practical matter as well, only one transaction has publicly been blocked out of more than 1500 applications for review since 1985.
Despite the widespread current debate, it remains to be seen whether any competing bidders will yet emerge in the play for Potash Corp., or whether the Chinese will indeed be successful in blocking or otherwise holding up the deal.
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