≡ Menu

The Scary takeover bid of PotashCorp by BHP Billiton

Since Halloween is just around the corner, it fits to have a scary story for a blog post. Anybody following the Canadian business scene is at least slightly aware of BHP Billiton’s takeover bid of PotashCorp. In Saskatchewan, the debate has taken a very political turn, with people dredging up arguments based on ideology.
The rallying cry “Potash belongs to the people, not the company” has been stated by many a pundit. It has also rehashed the Crown Corporation debate. Some revisionist historians state that taking this company public in 1989 was the worst economic decision Saskatchewan has ever made. Unlike these people, I am not so bold to state that PotashCorp would be the same company today if it were never sold.
So what is the big deal about this takeover bid? The Conference Board of Canada released a report showing the effect of the proposed bid. It determined that BHP would take advantage of incentives to reduce government payments by $2 billion over the next 10 years. This sounds like a lot, but BHP would only be taking advantage of incentives in place for any existing potash producer. The report bases these findings on the assumption that BHP will continue to develop it’s Jansen Lake mine, regardless of the outcome on the federal government’s review of the buyout. If BHP is blocked from acquiring PotashCorp, they may rethink their entire potash play.
While there is no doubt that this is a big story for the province and the country, what should we be concerned about?

  • Getting ripped off by potash companies — The Saskatchewan Government has a royalty system based on the profit of the company as well as the volume of product mined. The government has the ability to revisit these rates to protect its interest.
  • Poor working conditions — Any company working in the Province has to abide by the laws here. They have to compete with other companies for talent. PotashCorp and BHP will likely be very similar in their approach to attracting labour.
  • Poor corporate citizen — Each company has their own policy on giving back to communities they do business in.
  • Jobs moving out of the province — This is a risk in any industry. People worried about head office jobs are probably not aware that many of these jobs are currently based in Chicago. Both PotashCorp and BHP have made public promises to increase head office jobs.

These are the fears I think are valid in this situation. Insightrix did a survey of Saskatchewan resident’s views on the proposed takeover. The findings were:
A new online poll conducted by Insightrix Research Inc. on behalf of CJME and CKOM radio shows that 55% of Saskatchewan residents either strongly oppose (28%) or somewhat oppose (27%) BHP Billiton acquiring PotashCorp in its recently announced hostile takeover attempt. In contrast, only 14% support such a move by BHP Billiton, while 22% are indifferent on the issue and another 10% are unsure on the matter.

This shows a lot of resistance to the plan. However, the people surveyed weren’t exactly up to speed on the current situation:
It is noted however, that many respondents appear unfamiliar with PotashCorp’s current mix of investors, given that 39% of those who oppose the acquisition say they want the company to remain Canadian / Saskatchewan owned despite the fact that currently, a minority (approximately 30%) of the ownership in the fertilizer company is from Canadian sources. Further, when specifically asked about the ownership structure of PotashCorp in this survey, 23% of survey respondents believe it is still a Crown Corporation. In fact, only 53% correctly identify that the fertilizer company is actually a publicly traded firm. One in ten (9%) believe it to be a privately held organization and another 15% admit they have no idea of PotashCorp’s ownership structure.

Since both companies are making promises to the Saskatchewan public, it’s good policy for the government to remain coy. In the end, the deal will hinge on BHP and PotashCorp setting a price that works for both sides. Only at that point, the government should clarify its position. Going forward, Saskatchewan will benefit the most by having this resource managed by professionals that are motivated to maximize profits and economic activity.