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MELBOURNE/HONG KONG, Sept 7 (Reuters) - 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
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 China.
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.
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 effectively lose."
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 China.
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.
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)