Analysis - China posturing on potash sector deals

TORONTO/HONG KONG (Reuters) - Consolidation within Russia's potash sector and BHP Billiton's (BHP.AX) takeover bid for Potash Corp (POT.TO) are making China nervous, but any so-called probe by Chinese regulators is unlikely to have sufficient firepower to stymie the deals.

China, one of the world's biggest potash importers, is reportedly looking into both BHP's $38.6 billion (25 billion pound) hostile bid for Potash Corp, as well as the anticipated merger between Russian potash miners Uralkali (URKA.MM) and Silvinit.

Both moves signal the strategic importance of potash -- a key crop nutrient used on sugar, corn, coffee, fruit and vegetables -- and China's determination to fight what it considers to be threatening consolidation.

China's actions, however, may carry little impact, even if its regulators deem the acquisitions to be monopolistic, some legal experts say.

"I am not aware of any grounds on which China can legally stop these deals from going ahead," said Darryl Levitt, a lawyer with Macleod Dixon LLP in Toronto. "It's really just posturing to secure supply."

China imported slightly more than 5 million tonnes of potash in 2008. About 60 percent of those imports came from Russia and Belarus, with roughly 25 percent coming from Canada. Potash Corp, which accounts for roughly 20 percent of world potash production, sold about 7 percent of its 2008 potash output into China.

Chinese antitrust laws give regulators jurisdiction over a foreign merger if two of the parties each have over 400 million yuan (38 million pounds) in sales in China in the last fiscal year, and if their worldwide sales exceed 10 billion yuan.

On the surface, both the potential merger in Russia and BHP's hostile bid for Potash Corp could fall under the purview of Chinese regulators.

Even so, there is little wiggle room for China. BHP, which owns undeveloped potash assets but does not currently produce the fertilizer, could argue that a takeover of Potash Corp would represent a change in ownership but no increase in market share.

"If it's just a change in the ownership of the assets, with no overlaps, the only major theory they could use is deep pocket theory: You are very big, very well resourced, and you already have a lot of clients for other products and that means you have a lot of channels to distribute your products," said antitrust lawyer Marc Waha, partner at Norton Rose in Hong Kong.

"These theories work very well when you're talking about branded goods, retail," Waha added, explaining that the case is harder to prove with industrial goods and commodities.

ADDITIONAL ASSETS

In the BHP case, Chinese regulators may take into account future production from potash deposits that BHP owns, like its Jansen project in the Prairie province of Saskatchewan, which is expected to produce over 8 million tonnes annually, once complete.

"The fact that BHP has its own potash reserves may make it easier for the antitrust authorities to see an overlap between the two parties," Waha said, adding that this argument would be difficult to prove if U.S. and EU regulators don't think it was a problem.

The world's largest miner has said it still plans to build the Jansen mine regardless of whether its takeover bid succeeds, and its record shows it favours full-out production to seize market share over the typical potash industry practice of tailoring production to demand.

But BHP -- which has said the deal only needs approvals from regulators in Canada and the United States -- can spin it both ways. The miner can also argue that it has yet to take a final investment decision on the development of Jansen and its other potash projects in the province.

GLOBAL APPROVAL

Regardless of China's moves, BHP is already taking zero chances, and is seeking regulatory approvals outside of North America in countries such as Brazil. Potash Corp is a big seller to Brazilian importers through Canpotex -- the export arm of Potash Corp, Mosaic Co (MOS.N) and Agrium Inc (AGU.TO).

The miner has also said that it will seek antitrust clearance in other countries and jurisdictions, if required to do so by law.

"Transactions of this size will often trigger merger notification requirements in anything between 10 and 30 jurisdictions," said Steve Szentesi, a Vancouver lawyer who focuses on competition law.

China can impose penalties and force divestments of assets in country, if companies run afoul of its antitrust laws. However, none of the players involved in the M&A manoeuvring has any major assets in China.

Moreover, BHP, Potash Corp and the Russian potash miners sell commodities to China that are in huge demand both within and outside China. The companies are able to provide these at a higher quality, volume and reliability than others, so China would hurt itself if it decides to impose penalties, or refuse to allow BHP and others to sell there.

"There is still no precedent for China's antimonopoly authorities having jurisdiction outside China," said Chinese lawyer and antitrust expert Dong Zhengwei. "If no domestic company asks for action, the Chinese antimonopoly bodies may not necessarily act."

(Additional reporting by David Stanway and Lucy Hornby in Beijing; editing by Rob Wilson)