La chasse est ouverte. M&A season is just starting.

30 09 2010

Hunting Season


 On August 18th, BHP Billiton announced its intent to proceed with the hostile acquisition of PotashCorp as discussions earlier in August regarding a tie-up in more consensual terms have been inconclusive. BHP Billiton is thus making an all cash offer of $130 a share to PotashCorp, assumed to be a premium of 20 per cent. The bid totals roughly $40 billion.  PotashCorp considers this deal: “wholly inadequate and is not in the best interests of the company” and has already filed a lawsuit which BHP quickly dismissed as foolish but was nevertheless allowed to proceed by a U.S federal judge.

To go through with the transaction, BHP would have to obtain approval of Canadian and US competition authorities as well as to be granted authorization under the Investment Canada Act. I’d like to focus on the latter, as this time could be different.

Investment Canada Act: Net Benefits, National Security and Political Mood of the Day.

Under the Investment Canada Act, an enterprise wishing to acquire a Canadian firm will have to go through a review process to prove that its investment is of benefit to Canada’s economy (and security!), usually by entering into a confidential agreement in which it commits itself to continuity by way of maintaining a certain workforce level, investment levels and training programmes. Of the over 1500 reviews undertaken under the Investment Canada Act since 1985, only one proposal has been disallowed.

In this process, the Canadian firm being acquired, government agencies and provinces likely to be affected may submit documentation to inform the review.

Federal Government

As mentioned above, the federal government has a habit of not interfering with foreign direct investment although these reviews have usually taken place in relatively good economic periods where benefits can more easily be foreseen. Yet since 2008, the Government has had to deal with firms’ inability to stick to their commitments under the Act.

The most prominent example of this is US Steel, which is been sued by the government for not respecting the terms of the agreement it entered into when acquiring Stelco. One might argue that with the “restructuring” and its long labour conflict, Vale Inco has de justesse avoided legal troubles.

Considering these unfortunate experiences, the variable speed economic recovery and fears that super majors may be on a spending spree that they later on find not to be worth it, I am guessing that there is an imperative to be extra cautious with upcoming reviews. BHP has hired a team a top lobbyists to make representations in Ottawa.

Provincial Government

Saskatchewan has an important stake in the well-being of the potash industry. The premier met with BHP Billiton, on Sept 20th, and concluded that “My views may change … but as of today, I don’t know how we are better off if this takeover or any other subsequent change happens,” Mr. Wall told reporters. “I don’t see how Saskatchewan or Canada is better of.” Of benefit does not necessarily mean better of. The intention of BHP to pull out of Canpotex may have something to do with the premier’s unease as it could lower potash prices and in turn depress its own royalty revenue.

Potash Corp and Shareholders

PotashCorp thinks 130$ a share undervalues the company. Shareholders believe that too and are probably the fiercest opponents to the transaction. Stephen Jarilowsky from Jarilowsky Fraser referred that at some point the stock was worth 200$ (but that was in June 2008 at the peak of the commodities boom). I guess many shareholders are nostalgic of the old normal.

Potash Corp definitely wants to provide shareholder with other and better alternatives to BHP Billiton. Some options include putting together a management buyout with backing from China, pension funds, sovereign wealth funds and possibly Mosaic.




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