Third time unlucky for BHP
– The opinions are the author’s own –
No one doubts BHP Billiton is the smartest, most innovative mining company in the world. It has shaken up a once-sleepy sector and transformed pricing and marketing of raw materials from copper to coal and iron ore.
BHP is the mining sector’s Goldman Sachs. It employs the best minds and campaigns to change practices which have been long-established but which the firm considers outdated in a successful quest to unlock immense value for its shareholders.
According to the firm’s website “At BHP Billiton we’re looking for people who want to grow with us around the globe, take chances and stand out from the crowd. We need people who embrace tomorrow, have vision, love stretching their minds and going far beyond what they thought was achievable.”
But like Goldman, BHP’s success has come at a price. The company is unloved. BHP’s success has bred envy among its competitors. Worse, the company’s aggressiveness has made it a host of enemies among competitors, customers and regulators. Now that backlash is hampering the company’s ambitions to grow.
In the past few decades, the company which revels in its nickname as the Big Australian has found itself embroiled in acrimonious battles with China over the price of copper and iron ore; steelmakers in Europe and Asia over pricing; Australia’s Labor Party over mineral taxes; and competition authorities around the world over the proposed takeover and later the joint venture with Rio Tinto, both now abandoned.
While BHP has won many battles, it has left a legacy of bitterness and mistrust, which is now shaping the reception of big deals. Regulators in particular have become very sceptical when reviewing the firm’s plans.
DEAL MACHINE SPUTTERS
The Canadian government’s proposed decision to block BHP’s proposed takeover of Potash Corporation of Saskatchewan is the third time in less than two years one of the company’s big strategic deals has fallen apart.
BHP reportedly secured a tentative agreement from antitrust regulators to acquire Rio in late 2008, but only after a firestorm of protest from customers, and with significant conditions. The deal fell apart when the financial crisis destroyed the value BHP could have achieved from the required disposals.
In 2010, BHP and Rio Tinto could not even secure clearance for a much less ambitious production joint venture in iron ore, amid customer opposition and heightened scrutiny from regulators. Now Canada has all but blocked BHP’s bid to enter potash in a significant way. BHP can still make representations but it will be tough to reverse the decision at this stage.
To have one deal blocked by the regulators may be regarded as a misfortune; to lose two looks like carelessness.
BHP vaulted to prominence through a series of brilliant deals that saw the company merge with Billiton and then acquire WMC Resources, owners of the fabled Olympic Dam copper, gold and uranium mine in South Australia. It has bought or developed a string of world-class mining assets, including the giant Escondida copper mine in Chile.
So what is going wrong with BHP’s fabled deal-making machine? Many analysts focus on the role of Chief Executive Marius Kloppers, who took the helm in 2007. Kloppers is seen as either accident-prone or a highly-disciplined dealmaker who refuses to overpay, depending on perspective. In reality the firm’s problems are more structural.
HOW THE FIRM IS PERCEIVED
The string of failed deals has highlighted the chasm between the way BHP sees the world (and itself) and the way the company is perceived by its competitors, customers, regulators and politicians.
BHP sees itself as an innovative and daring firm, operating in highly competitive markets and well- rewarded for risk-taking and skilful management. Others see the company as an over-mighty titan that already enjoys significant market-power and is seeking more. It is those suspicions that are fuelling opposition to the company’s strategy among customers and regulators.
Convinced that it is in the right, and acting in the interests of shareholders, BHP has failed to understand how its actions would be perceived by others.
The original statement announcing the joint venture with Rio was long on how the deal would benefit shareholders but short on how it would deliver advantages for customers. The companies even proposed a small share of output would be marketed jointly, stoking fears about the impact on competition, until that was dropped in response to hostile reaction from customers and regulators.
If the company’s managers and professional advisers wanted the deal to succeed, they needed to anticipate these fearful and hostile reactions, and pre-empt them. BHP needed to explain how the deal would make more ore available, faster, and at lower and more stable prices to customers. Instead there was a sense that the company did not care. It simply relied on its superior legal and econometric firepower to win the inevitable regulatory battle.
In the bid for Potash Corp, BHP indicated it wanted to shake up marketing and pricing for fertiliser by withdrawing from Canpotex. Amazingly, BHP managed to alienate both producers (worried that prices would collapse without a strong marketing agreement) and customers (fearful they would rise if BHP remade the market in the way the firm helped remake the iron ore market).
It failed to anticipate Saskatchewan’s world-class potash reserves would be seen as a strategic asset (not merely valuable dirt) in a prairie province with a strong tradition of progressivism.
Potash might be just another world-class resource to a giant multinational operating around the globe, but it is one of few world-class assets for a prairie state a long way away from major financial centres. That reaction too was predictable and needed skilful handling.
Canada’s decision to block the bid for Potash Corp has provoked inevitable criticism the government is giving in to protectionism and sending a damaging signal to international investors the country is no longer open to business. Ottawa has only once before used the “net benefit” test under the Investment Canada Act to block a foreign takeover.
But mineral resources are not like manufactured products and services. Different legal regimes apply to them around the world, but in no major jurisdiction is mineral ownership treated same way as the ownership of a factory producing widgets.
Minerals are “special”. There is always some implied element of sovereign or common ownership, enforced by special leasing, royalty and tax regimes. Perhaps such ideas are feudal and irrational — a throwback to an earlier era when all land and resources was ultimately owned by the sovereign and enjoyed by his tenants-in-chief and other subjects. But that does not make them any less powerful.
If the potash deposit was located in Australia, BHP’s home country, would Canberra be any happier to let a Canadian company buy it? If Canada’s investment regime has hitherto been famous for its openness to foreigners, Australia’s is notorious for being closed, using the rather opaque processes of the Foreign Investment Review Board.
Australia’s government has already turned away China’s attempt to up its strategic shareholding in Rio Tinto in 2009, and blocked Royal Dutch Shell’s attempt to take over Woodside Petroleum earlier this decade.
China’s attempts to buy into western resource companies are often controversial because the buyers are state-controlled or semi-state owned, and resource owning countries worry about producing assets falling into the hands of consumers who might not maximise their long-term value. But in reality such arguments are just another form of nationalist protectionism that can be whipped up to frustrate a foreign buyer.
Acquiring Potash Corp would have required a deft political touch BHP has not often displayed in recent years. Before the company tries to make another big strategic play, it needs to rework its image, review its internal strategy process, and learn to act nicer.