Canada's government blocked BHP Billiton's foreign takeover bid for Potash Corp. (POT) of Saskatchewan, bowing to political pressure to protect a rich natural resource and prevent what would be the largest corporate takeover in the world this year.
Industry Minister Tony Clement said Wednesday that he's not satisfied the proposed transaction is likely to be a net benefit to Canada. Clement said BHP has 30 days to appeal.
"Some decisions can only be taken once and there is no turning back - ever," Clement said. "Such is the case today."
Anglo-Australian BHP Billiton (BHP), the world's largest mining company, is attempting a hostile $38.6 billion takeover of Potash Corp., a Saskatchewan-based company that controls more than 25% of the world's supply of potash, a fertilizer ingredient critical to the global food supply.
Clement declined to elaborate on his ruling. BHP Billiton said in a statement that it was disappointed but would continue to work with the minister and review its options.
An Emotional Issue
BHP's bid became an emotional issue in Saskatchewan. A foreign takeover of the company would come just as the province is starting to boom after suffering low growth and population loss for decades. Potash is the province's most prized resource - its government collects royalties from it - and there are also concerns in Canada about foreign takeovers after previous resource deals led to broken promises about job guarantees and investment.
Had the deal been approved by the government and shareholders, it would have been one of the biggest in Canadian history.
It's only the second rejection of a foreign takeover in Canada in 25 years, but it risks the country's reputation of being in favor of foreign investment.
Canada's government faced a dilemma. On the one hand, it firmly believes in the free market. On the other, it would be risky for a federal prime minister to overrule a provincial premier from western Canada. Brad Wall, Saskatchewan's premier, is dead set against the takeover.
Opposition to the deal gained steam in recent weeks as conservatives in Prime Minister Stephen Harper's home province of Alberta - Canada's most conservative province - spoke against it.
Wall ran a vigorous campaign for Canadian hearts and minds. He said approval of the bid would have been "profound betrayal" of Saskatchewan and its people.
Wall thanked Clement for the decision. He said he too struggled with the decision.
"We are still a nation that is open. We are a country that welcomes foreign investment," Wall said. "We are a free-trading country, but we have been blessed with a great amount of natural resources. Potash is one, and so we may have to act differently in that regard."
A National Symbol
What was once a little-known resource became a symbol of national pride in recent weeks. Saskatchewan has over half the world's reserves of potash and Potash Corp. is one of the province's largest revenue-generating companies, accounting for 15 percent of its budget as recently as two years ago.
Wall said it isn't in the strategic interest of Canada to allow BHP to buy a company that owns more than 25 percent of the world's supply of potash. Wall also said the province would also lose out financially.
Harper has a minority government and risked a major political backlash in Saskatchewan. The Conservatives hold 13 of the province's 14 federal seats in Parliament.
Stephen Clarkson, a political economy professor at the University of Toronto, called the decision a political no-brainer. Clarkson said there was little downside to vetoing the takeover because Canadians are not pressing for more foreign ownership.
"It's going to have some reverberations on Wall Street for five or 10 seconds and then things will go back to normal," Clarkson said. "It's not a sign of a change of policy for Canada, which is traditionally open to foreign investment. Brazil, India or China wouldn't allow the same takeover of their assets."
Harper had been one of the most vocal world leaders against protectionism, but this would be the second foreign takeover he's blocked in two years.
Harper's government has allowed foreign takeovers in Canadian oil production, which is also regarded as a strategic industry.
But in 2008 it blocked a U.S. company's takeover of the space and satellite division of MacDonald, Dettwiler and Associates Ltd., Canada's leading space technology firm - the first time the 1989 law on takeovers has been used in this way.
Potash Corp. was created by the Saskatchewan government in 1975 after the government nationalized many smaller U.S.-owned potash companies based in the province. It was privatized in 1989.
The government's tentative decision is yet another setback for BHP Billiton. BHP Billiton and Rio Tinto just scrapped plans for a $120 billion iron ore joint venture in the remote Australian Outback after antitrust regulators in Australia, Europe and Asia opposed it or demanded changes. The global financial crisis also derailed a planned merger of the two companies.
Potash Corp. said in a statement that the federal government's decision "does nothing to change our view that the BHP Billiton $130-per-share offer is wholly inadequate." The company's directors rejected the bid in August and they reiterated Wednesday that shareholders should reject it.
Shares of Potash Corp. fell $7.20, or almost 5%, to $138.30 in after hours trading on the New York Stock Exchange.
BHP Billiton shares rose more than 3% to $43.99 Australian dollars when the Australian market opened soon after the news broke, as investors reacted with apparent relief that the company may have to abandon a potentially long and costly bid for Potash.
"BHP Billiton is disappointed, but continues to believe that the offer is of net benefit to Saskatchewan, New Brunswick and Canada," BHP said in a statement.
BHP Billiton was hoping to profit from what it expects will be rising fertilizer demand in China and India. China has expressed unease that a BHP takeover of Potash might create a "potash monopoly" that would boost prices and hurt China. A Chinese state-owned company was said to be interested in making a rival bid but no other offer has surfaced.