The Great Debate UK
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.
Can it really be a mere six months since Rio Tinto agreed to sell its birthright to Chinalco, losing its chairman-designate in the process? Indeed it can, and it shows how fast things change in the whacky world of commodities. In February, the directors panicked that the business might run out of cash; now they are signalling that they should be able to find $1.75 billion, or around $1.15 a share, for a dividend next year.
In hindsight, it looks frightfully clever of them to use the balance sheet of China Inc. (for a mere $195 million break fee) to buy time to find a better way out of the financial hole they dug. After all, the Chinalco deal could not be consummated without shareholder approval, which could not be sought until various regulators round the world had agreed it, a process bound to take many months.