Canada may have shot itself in the foot on Potash

November 4, 2010

Canada may have just shot itself in the foot. The Ottawa government said BHP’s $39 billion takeover bid for Potash Corp provided no net benefit to the nation. There’s some basis for this in the specific instance. But what the decision fails to reflect is the long-term damage such a politicized rejection does to Canada’s ability to attract capital.

While BHP still has 30 days to plead its case, the decision by the conservative government of Stephen Harper will be regarded as a major victory in Saskatchewan. The provincial government opposed the takeover of Potash, an asset that it used to own. It clearly marshaled some persuasive arguments for its resistance, though Minister of Industry Tony Clement said he was prohibited from sharing them.

However, the province had earlier estimated the takeover could reduce tax revenue 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 its target’s income. The rest would be the result of piling acquisition debt onto its target.

BHP had said it was willing to ensure there was no tax impact. Of course, many companies that have made promises under the Investment Canada Act’s requirement that takeovers create a benefit for the nation have failed to live up to their pledges.

But that highlights a flaw in the law’s enforcement which can and perhaps ought to be fixed regardless of the merits of BHP’s case. It, however, should not be the basis for rejecting a deal that created no obvious threat to competition or consumers.

After all, the longer-term ramifications of protecting Potash may hurt Canada, particularly if investors now view Canada’s natural resources as takeover-proof. That would raise financing costs, reduce Toronto’s rising might as a financial center for the global mining and metals sector and, ultimately, reduce Canadian wealth. It’s hard to see how an outcome like that would be of any net benefit to the country.

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