HONG KONG/SYDNEY BHP Billiton's (BHP.AX) $39 billion hostile bid for Potash Corp (POT.TO) has set a high bar for rivals, but China could yet launch its own bid to secure supply of the vital crop nutrient.
Top Chinese fertilizer company Sinofert (0297.HK) -- in which Potash (POT.N) owns a 22 percent stake -- is the most logical candidate to lead a counter offer, industry sources say.
While Sinofert itself is small -- its $3.8 billion market value is less than a 10th of Potash's -- its parent, Sinochem Group, is a huge state-owned group. Sinochem, the country's biggest chemical trader and top fertilizer firm, had revenues of $36 billion last year.
Aluminum giant Chalco (2600.HK) (601600.SS), and state-backed chemicals company ChemChina, could also emerge as potential bidders, according to the sources.
"I assure you there are numerous organizations in China who would chase potash (assets)," said an Asia-based investment banker who has advised Chinese resources companies on overseas deals.
"China has very few potash reserves for itself, it's a commodity which they're going to be in short supply of. And, does China want to be over the barrel on yet another commodity?"
A spokeswoman for Sinofert declined to comment, while Chalco and ChemChina could not be reached for comment.
Even for cash-rich Chinese companies, the price-tag remains the biggest obstacle, with few companies able to match BHP's all cash offer at $130 per share.
A Chinese suitor -- if one emerges -- is more likely to link up with a sponsor such as the country's $300 billion sovereign wealth fund China Investment Corp.
"Now, you could maybe cobble together a consortium that would comprise a Chinese player with a Chinese financial investor, but again, those things are difficult to knit together at the best of times," said another banking source.
Both bankers were unauthorized to speak publicly about the matter and declined to be named.
A RIO MODEL?
Two years ago, at the height of BHP's hostile takeover attempt for Rio Tinto (RIO.AX) (RIO.L), China's state-back Chinalco bought a 9 percent stake in Rio, a purchase meant to help block the deal.
While Chinalco saw $10 billion quickly wiped from its investment, BHP did ultimately abandon the deal, much to the happiness of Beijing, which was worried about the pricing clout a combined BHP-Rio would have over a host of commodities needed to fuel China's economic growth.
While Potash might not have the same broad and strategic importance as a diversified miner such as Rio, the mineral is a crucial ingredient in producing better crop yields. That's of vital importance to China and its 1.3 billion people as its growing middle class increases the rate of food consumption.
A decreasing amount of arable land worldwide adds even more upside to the long-term outlook for potash, and the desirability of potash assets.
Rio and Brazil's Vale (VALE.N) have also been mentioned as potential rival bidders for Potash. The notion of BHP reaching out to a foreign buyer is also being discussed among bankers.
"One scenario is for BHP to have a pre-sale agreement and partner up with a Chinese firm for any part of the Potash operations it doesn't like," said another banker.
Also at issue for China in the Potash takeover saga is the testy matter of annual potash price negotiations.
Potash prices are typically negotiated by three major companies: the Belarussian Potash Company (BPC), the marketing arm of producers Belaruskali and Russia's Uralkali (URKA.MM); Canpotex, a joint arrangement between Potash Corp, Agrium Inc (AGU.TO) and Mosaic Co (MOS.N); and PhosChem, which also acts on behalf of Potash Corp and Mosaic.
Some agricultural experts say BHP's potential ownership of Potash will not have a major impact on the potash pricing regime, given that BPC has set the tone for prices with major buyers in China and India at prices below the ones that Canadian producers want to see in recent years.
Still, BHP -- which strongly advocated a dismantling of the annual iron ore pricing benchmark -- is a critic of annualized commodity contracts.
The world's largest miner could easily use its considerable weight to fight for a more market-based potash pricing system, frustrating Chinese demands for lower prices.
"Someone like BHP coming in would be a bit more of a maverick in terms of bringing the industry forward like they did with iron ore pricing -- not them alone, it had to be everyone else -- but they were certainly championing a new system," said James Wilson, an analyst at DJ Carmichael.
"It wouldn't be surprising if they did a similar thing with potash as well."
(Additional reporting by Denny Thomas in HONG KONG; Editing by Michael Flaherty and Lincoln Feast)