Blocking BHP’s Potash bid could damage Canada

November 2, 2010

Blocking BHP’s move on Potash Corp could be damaging for Canada. The government will decide by Wednesday whether to allow the $39 billion deal to proceed. A BHP takeover might squeeze the tax the fertilizer giant pays its home province. But those costs are outweighed by the discount that the country’s companies would suffer if Canada was deemed to have turned protectionist.

Under the Investment Canada Act’s broad remit, foreign investments must be a net benefit to the country. The government must weigh factors like the impact on jobs, competition, productivity, the ongoing participation of Canadians in the business, and the country’s ability to compete in world markets.

In BHP’s case, there is no impact on competition. While the Anglo-Australian miner plans to run the business differently if it takes control, its proposals are not that radical. Even if Potash Corp remained independent, a different management team could follow a similar path to BHP.

The bid does throw up some genuine concerns about the impact on Saskatchewan, where Potash Corp is based. The province estimates the takeover could reduce tax revenues by C$3 billion over a decade. Two-thirds of the hit would arise if BHP used tax credits from developing its own potash assets to shelter Potash Corp’s income. The rest would be the result of piling acquisition debt onto its target. BHP is willing to ensure there is no tax impact, though foreign acquirers in Canada have a poor track record of keeping their promises.

However, blocking the deal would have broader repercussions. The danger is that investors would view Canada’s mining sector as takeover proof, which would hit share prices and increase financing costs. It could also make Canada less attractive for other miners. Last year, mining companies raised $22 billion of equity capital in Toronto for projects in Canada and abroad—34 percent of mining equity capital raised worldwide. If the government was vague about the reasons for its decision, other Canadian companies might also be viewed as enjoying protection from a change of ownership.

If the Canadian government wants to capture a greater share of its natural resources it can do so through the tax system. But if it wants to maintain its image as an open market, Canada cannot afford to stand in the way of BHP’s bid.

Comments

“However, blocking the deal would have broader repercussions. The danger is that investors would view Canada’s mining sector as takeover proof, which would hit share prices and increase financing costs.”

What complete hogwash. Canada has approved over 1600 foreign takeovers, and refused only one (an aerospace company, for national security reasons). A refusal with respect to this unique company won’t hurt the investment climate one bit, anymore than the anti-takeover measures that keep Alcoa in Pennsylvania hurt the USA. In fact even if the Canadian government rejects this deal, Canada will still be the most takeover friendly country in the world.

Posted by MaggiesFarmboy | Report as abusive
 

…and $3 Billion is not chump change to a province of only 1 million people.

Posted by MaggiesFarmboy | Report as abusive
 

>>n BHP’s case, there is no impact on competition. While the Anglo-Australian miner plans to run the business differently if it takes control, its proposals are not that radical.

Withdraw from Canpotex and cut prices? How is this not radical and harming competitors? And look what BHP did to customers when it broke the iron-ore pricing accords!

As well, I am really confused why in a latter paragraph the author mentions the (possible) detrimental effects on share prices due the decision, but then in the last paragraph suggests raising mineral royalties as a solution. An increase in royalties would surely be a much harder hit to all mining share prices, than any perceived takeover-premium on a few large companies.

Posted by EisenKreuz | Report as abusive
 

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