BREAKINGVIEWS-Sinochem could struggle to frustrate Potash
-- The author is a Reuters Breakingviews columnist. The opinions expressed are her own --
By Una Galani and Wei Gu
LONDON, Sept 2 (Reuters Breakingviews) - Sinochem could struggle to make a move on Potash Corp of Saskatchewan. Intervening in the battle for control of the Canadian fertiliser group would fit with the state-owned firm's aim to be a mainstay for China's agricultural safety. But Sinochem, which has reportedly hired advisers to consider its options, will face other hurdles if it wants to block BHP Billiton's $39 billion hostile bid.
China has strategic reasons to covet Potash Corp. The Middle Kingdom is already the world's second-largest potash importer. BHP's plan to run Potash Corp's operations at full capacity would squeeze out marginal producers, driving up long-term prices.
If Sinochem chooses to intervene, it could mount an all-cash takeover, or aim to frustrate BHP by buying a minority stake. It could even try to agree some form of joint venture with Potash Corp that secures supply for the Chinese.
Yet a production deal would be complicated by Potash Corp's contractual agreements governing the sale of its exports. And if Sinochem wanted to prevent BHP from consolidating Potash Corp's operations, it would need to buy at least 33.6 percent of the company. At Potash Corp's current share price of $145 a share, it would have to tie up $14.5 billion in a passive investment.
What's more, Potash Corp's board, which has been fighting BHP's offer with a value-based defence, would be unlikely to welcome an intervention that prevented a full takeover. It would probably prefer a rival bid.
Financing a deal shouldn't be a problem. Sinochem's annual report shows the diversified trading group, which has interests in agriculture, real estate, energy, chemicals and finance, generated pre-tax of barely $900 million in 2009. Yet the government could easily provide the funding.
However, it is far from clear that a Chinese intervention would win approval from the Canadian authorities. The country's foreign investment act requires proof that an investment would be a net benefit to the country. But China's desire for low prices could undermine local mining royalties, which are based on profits.
While money may be no object for the Chinese, a full takeover of Potash Corp would cost $43 billion at today's share price. That would be three times the size of Chinalco's dawn raid on Rio Tinto -- China's largest outbound foreign investment to date. The Chinese have a weighty decision to make.
-- China's state-run Sinochem has hired HSBC (HSBA.L) to advise it on its options for Potash Corp of Saskwatchewan (POT.TO), which is subject to a hostile $39 billion takeover from BHP Billiton, the Wall Street Journal reported on Sep. 1.
-- The WSJ said the move by Sinochem was preliminary and doesn't mean that the diversified firm has decided to make a counterbid. On the same day, a Chinese newspaper reported that Beijing was also considering launching an anti-monopoly investigation into BHP's proposed acquisition.
-- Separately, the energy minister of Saskatchewan said the province would have "lots of concerns" about a Chinese sovereign fund or state-owned company buying part or all of the company.
-- Sinochem has five business segments including agriculture, energy, chemicals, real estate and finance. The privately held group owns 53 percent of Sinofert Holdings, a fertiliser business listed in Hong Kong. Potash Corp owns 22 percent of Sinofert.
-- Potash Corp's shares closed on Sept 1. at $145, above BHP's offer of $130 per share which Potash Corp's board has advised shareholders to reject.
-- Reuters: China digs for ways to stymie BHP's Potash Corp bid [ID:nSGE68101H]
-- Reuters Poll: BHP investors set $155 as top price for Potash [ID:nSGE6800MP]
-- For previous columns by the author, Reuters customers can click on [GALANI/]
(Editing by Andrew Macdonald and Peter Thal Larsen)
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