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Potash bid a test for takeover rules – The Globe and Mail

In Canada on August 17, 2010 at 21:01

Jeremy Torobin and Andy Hoffman

Ottawa and Vancouver From Wednesday’s Globe and Mail

BHP Billiton Ltd (BHP-N70.21-1.73-2.40%).’s massive bid for Potash Corp. of Saskatchewan (POT-T147.3430.1125.68%) is forcing Ottawa to contend with a hot-button issue that went dormant with the credit crunch: how to respond to foreign suitors poised to take over major Canadian corporations.

The Harper government, burned by what it believes was the failure of companies such as U.S. Steel and Vale SA to keep promises about Canadian jobs, is warning potential acquirers of Potash Corp. they’ll be held to the commitments they make in order to satisfy federal scrutiny of foreign bids.

Under the Investment Canada Act, a foreign purchase of a domestic company must provide a “net benefit” to the country. Such acquisitions can also be subject to a national-security test, particularly if the purchaser is a state-owned enterprise, which could come into play if a Chinese company joins the takeover battle for Potash.

During the pre-recession takeover boom, the government declined to use the act to block a series of mega-deals for top Canadian companies, including Vale’s purchase of Inco Ltd., Xstrata PLC’s acquisition of Falconbridge Inc. and U.S. Steel’s deal for Hamilton steel maker Stelco Inc. But Ottawa’s acquiescence to those deals generated considerable controversy, and came under even more criticism after the recession hit and the new owners cut jobs. The government is now locked in a legal battle with U.S. Steel, accusing it of breaking the promises it had made to maintain employment and boost output at two former Stelco plants in Ontario; the company laid off or retired 2,400 workers and scaled back production, citing the effect of the global economic crisis on demand for steel.

“I think the evidence is very clear that foreign investment can be beneficial to Canadians, in terms of innovation, in terms of competition and in terms of Canadian jobs – but everybody has to follow the same rules,” Industry Minister Tony Clement told reporters Tuesday in Edmonton. Referring to U.S. Steel, Mr. Clement said, “in that particular case, our government’s opinion is the rules weren’t followed and that’s why we’re in court.”

The government has blocked just one deal since the Act was ushered in, when it stopped Vancouver-based MacDonald Dettwiler and Associates Ltd. from selling its space division in 2008 to a U.S. firm, citing national-security concerns.

Since fertilizer is so closely linked to farming and, by extension, security of Canada’s food supply, there’s an outside chance Ottawa could determine Potash Corp.’s mines are “strategic resource assets” that need protection. The government could also decide that too many jewels of Corporate Canada have fallen into foreign hands.

Still, most legal experts and industry players say the government is unlikely to stand in the way of a Potash Corp. takeover because such a protectionist ruling could devastate foreign investment in Canada.

“I would be very surprised if they decide to draw a line in the sand say ‘we’re not going to allow any more foreign takeovers of high-profile Canadian companies,’ ” Kevin Ackhurst, a lawyer with Ogilvy Renault in Toronto who specializes in takeovers and foreign-investment laws, said in an interview. “What is more likely to happen is they’ll use it as an opportunity to reaffirm their tougher stance post-U.S. Steel, that ‘yes, we’re open for business, yes, we want to encourage investment in Canada, but we’re going to hold you to your commitments.’ ”

BHP has already declared in its formal letter to Potash Corp. that its global potash headquarters would be located in Canada and the management of its Canadian potash operations would be based in Saskatchewan. The company also said it is prepared to live up to any required “commitments with respect to employment, capital programs and community programs.”

The key to Potash Corp.’s destiny may actually lie with the provincial government of Saskatchewan. The province could enact legislation or sign an accord with Potash Corp., that would give the province and the company more power to control an auction process. Provincial legislation requires that Potash’s head office remains in Saskatchewan.

The most likely white knight for Potash could prove to be the most controversial. With deep corporate pockets and a need to secure a long-term supply of potash, China is widely seen as the most likely rival to BHP’s unsolicited offer.

The world’s largest commodity consumer, China has had to tread carefully in its quest for Canadian resource assets after an overture for base metals miners Noranda and Falconbridge by state-backed China Minmetals Corp. ran into political opposition in Ottawa in 2004.

China and its booming resource-hungry economy covet Potash’s assets. However, if China wants to join an auction for Potash, it would likely have to limit its interest to a minority stake in the Canadian icon to ensure Ottawa’s approval. Such a structure would be politically palatable in Canada and consistent with China’s most-recent forays in the resource sector that have seen state-backed firms take minority stakes in Canadian oil sands and mining assets.

Last year, China Investment Corp. (CIC) bought a 17-per-cent interest in Vancouver base metals miner Teck Resources for $1.74-billion (Canadian). Na Liu, the founder of CNC Asset Management, which focuses on China’s equity markets and the global raw materials sector, suggested that an investment in Potash by CIC might help the Canadian company fight off BHP. Such an investment by China Aluminum Corp. in Rio Tinto helped it rebuff a merger proposal from BHP last year.

Canada has never rejected a foreign takeover of Canadian resource assets despite public concerns about the “hollowing out” of Canada’s mining sector. Ottawa gave the green light to the takeover of Inco by Vale SA of Brazil and Falconbridge by Anglo-Swiss miner Xstrata PLC in 2006, in exchange for employment level guarantees by the new owners.

During the global financial crisis, however, both companies cut jobs and shut down mines. Inco workers in Sudbury went on strike for more than a year, after Vale tried to cut compensation and pension benefits.

Unlike U.S. Steel though, Ottawa has said Vale, Xstrata and Rio Tinto have all lived up to their takeover commitments.

With files from Josh Wingrove in Edmonton

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