October 21, 2010 / 7:28 PM / 7 years ago

Q+A-What will Canada do about BHP's Potash bid?

Oct 21 (Reuters) - The province of Saskatchewan on Thursday urged Canada to block BHP Billiton’s (BHP.AX) C$39 billion ($38.2 billion) hostile bid for Potash Corp (POT.TO), leaving the Conservative federal government to decide whether to let the bid for the world’s largest fertilizer supplier proceed.

WHAT IS THE GOVERNMENT OBLIGED TO DO?

Under the 1985 Investment Canada Act, the government has to review any proposed foreign takeover of a Canadian company worth more than C$299 million to determine if the deal would be of net benefit to Canada. Industry Minister Tony Clement has already extended the initial 45-day review period by 30 days to Nov 3. He can extend the review for another 30 days with the permission of BHP. If Clement rules against BHP, the company then has the option of altering its bid.

WHY IS THE BID A CHALLENGE FOR THE GOVERNMENT?

The Conservatives, who only have a minority of seats in the House of Commons, face an election many expect to be held in the first half of next year. The party is only narrowly ahead of its rivals in the polls and if Ottawa mishandles the Potash issue it could cut the Conservatives’ popularity, and conceivably help lead to their defeat.

Blocking the bid would undermine the Conservatives’ reputation for being a pro-business party. If they let it go ahead, critics will accuse them of allowing corporate Canada to be hollowed out. Letting BHP buy Potash could also hurt Conservatives support in Saskatchewan, where Potash has one of its two head offices and most of its mines. The Conservatives hold 13 of the 14 Saskatchewan seats in the House of Commons.

WHY MIGHT OTTAWA RULE IN FAVOR OF THE BID?

The Conservatives came to power in early 2006 stressing a pro-business agenda. The government has cut corporate taxes, moved to cut red tape and regularly warns against protectionist trade barriers.

Canadian Prime Minister Stephen Harper said on Wednesday the bid was “a proposal for an American-controlled company to be taken over by an Australian-controlled company” -- remarks that some construed as a hint Ottawa would rule in favor. Government officials pointed out that Potash Corp has a head office in Chicago and the chief executive and nine of 15 senior executives are American. They said 51 percent of shares are held by foreigners, with 38 percent in American hands.

Federal opposition parties, as well as the Saskatchewan government, say they consider Potash to be a Canadian firm.

WHY MIGHT OTTAWA RULE AGAINST THE BID?

Saskatchewan and opposition parties say Potash Corp is too valuable to be sold to outsiders and point to other contentious foreign takeovers the government approved. Canada is suing US Steel (X.N) for breaking production and employment promises made when it bought Canadian steelmaker Stelco in 2007.

As part of the net benefit test, Clement must consider the potential effect on the economy, employment, exports, product innovation and Canada’s ability to compete in world markets. Clement can veto the bid if he concludes it would harm national security -- the reason Canada gave in 2008 when it prevented MacDonald Dettwiler and Associates Ltd MDA.TO from selling sensitive satellite technology to a U.S. company.

Clement said on Wednesday that the previous Liberal government had approved every single foreign takeover of a Canadian company that it had reviewed. “We turned down a bid and we have gone to court to enforce the Investment Canada Act,” he said.

WHAT ARE THE POLITICAL DANGERS OF ALLOWING THE BID?

If the government approves the bid it could damage the right-leaning Saskatchewan Party government in Saskatchewan, which is facing an election next year. The Conservatives have good ties with the Saskatchewan government.

In the 2008 election, most federal Conservative legislators won their Saskatchewan seats with large majorities. That said, Member of Parliament Kelly Block sneaked in by 262 votes and if the public mood soured, she and at least two others could lose their seats. This could hurt the Conservatives, who could also lose at least half a dozen seats in French-speaking Quebec. Dropping nine or 10 seats could make the difference between keeping or losing power. ($1=$1.02 Canadian) (Reporting by David Ljunggren; editing by Peter Galloway)

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