| MELBOURNE/HONG KONG, Sept 7
MELBOURNE/HONG KONG, Sept 7 China is clearly
worried that top global miner BHP Billiton (BHP.AX) may be
successful in its $39 billion bid for the world's biggest
fertiliser maker Potash Corp (POT.TO).
The rationale for China to derail the deal is clear, with
the world's most populous nation wanting to secure reasonably
priced supplies of the key crop nutrient to feed its people
with a shrinking supply of arable land.
But despite its ambitions and financial firepower, a price
tag above $40 billion and political sensitivities in Canada
limit China's options.
More on the BHP bid [ID:nN22340110]
Potash reserves/producers link.reuters.com/sum65n
StarMine comparative data: r.reuters.com/meh36n
Deal calculator graphic r.reuters.com/man27n
SINOCHEM AND PARTNER BUY BLOCKING STAKE
Probability: Mostly likely
Whatever action the country takes is most likely to involve
state-run Sinochem Corp, parent of China's largest fertiliser
distributor Sinofert Holdings (0297.HK).
To avoid running into Canadian regulatory obstacles,
Sinochem will possibly act alone, or it could link up with a
Chinese partner, or with non-Chinese partners to grab a
blocking stake in Potash Corp (POT.N).
The Canadian government has not raised issues against
foreign stakes in companies as long as they are not controlling
stakes, making this the most viable option.
China used this tactic in 2008 in an attempt to thwart
BHP's (BLT.L) bid for Rio Tinto (RIO.AX)(RIO.L), a deal that
would have brought together the world's second- and
third-largest iron ore miners and the biggest suppliers to
In a share raid, Chinalco teamed up with U.S. aluminium
producer Alcoa Inc (AA.N) to pick up a 9 percent stake in Rio
Tinto for 60 pounds a share -- a hefty 21 percent premium to
Rio's share price at the time and close to double its current
price -- to become the miner's biggest single shareholder.
The move forced BHP to raise its all-share offer for Rio
when it went hostile. In the end BHP scrapped its bid due to
the global economic slump and Rio's $40 billion debt pile, and
never had to resolve how it would deal with Chinalco.
In the battle for Potash Corp, the question is: How much
would do the job?
China and any partners would have buy more than a third of
Potash Corp to stop BHP, because Canadian takeover rules allow
an acquirer to move to full control of a company once it has
secured acceptances from 66.66 percent of shares.
Even if China gets a big stake, BHP has a strong enough
balance sheet to raise its bid from $130 a share to entice
Potash Corp shareholders and still win the day.
CHINA DOES NOTHING
Potash is not seen to be as having the same strategic value
to China as a commodity like iron ore, and it would not want to
face the embarrassment of yet another failed deal.
Last year, Chinalco suffered a double blow when Rio Tinto
scrapped plans for a $19.5 billion tie-up with Chinalco and
instead opted to form an iron ore joint ventre with BHP.
In 2005, state-owned oil group CNOOC had to abandon a bid
for Unocal in face of U.S. political opposition and state-run
Minmetals scrapped a bid for Canadian zinc and copper miner
Noranda amid labor concerns about China's human rights record.
With a track record like that, it is quite possible that
China will hold back this time.
"They've got to sit there and go, 'Are we going to
embarrass ourselves if we're going to try and do something
here?'" said another resources banker in Asia who has advised
state-owned companies on outbound deals.
"They've got to be careful not to take on BHP again and
CHINA TRIES TO USE ANTI-MONOPOLY RULES TO STALL BHP
Under its anti-monopoly rules, China could require BHP to
submit its takeover plan for approval, given the size of the
deal and BHP's role as a supplier of other commodities to
While BHP does not currently produce potash, it has plans
for a big mine to start producing in about six years. Chinese
regulators, when evaluating the deal, could take into account
that future production in determining whether a merged BHP and
Potash would dominate potash supplies.
The potential success of this route is low for China as its
antimonopoly law has yet to be put to the test on a takeover
outside its own borders.
FULL BID FOR POTASH CORP
Sinochem may want to take over Potash Corp to keep it out
of BHP Billiton's hands, as it is worried about BHP gaining
more control over potash prices than already exists in the
Canpotex export regime.
Sinochem and other chemical firms are relatively small and
bankers say that even with backing from China's $300 billion
sovereign wealth fund, China Investment Corp (CIC), a full bid
by Sinochem would be tough.
"We expect the decision will be made pretty soon, but you
know we also understand that things take time to get organized
in China -- this is not something that people have ever
contemplated," said an Asian resources banker who has advised
state-owned Chinese firms on outbound deals.
"I mean, $40 to $50 billion is a lot of money. This is a
huge, huge step."
A full bid for Potash Corp, whether by Sinochem alone or
with CIC, would run into trouble with regulators in Potash
Corp's home province of Saskatchewan.
The province depends on potash royalties for hundreds of
millions of dollars a year, and a top official has voiced
worries about a customer potentially controlling Potash Corp.
(Editing by Lincoln Feast)