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Scenarios - What's next for BHP's Potash bid?

OTTAWA/TORONTO (Reuters) - Canada could decide on Tuesday whether to allow BHP Billiton to pursue its $39 billion (25 billion pound) hostile bid to take over Potash Corp, the world’s largest fertilizer maker.

Even after reports that bureaucrats had recommended the government allow the bid to proceed, BHP’s shares rose on speculation that Ottawa would stop the Anglo-Australian miner.

The government dismissed the newspaper reports, as well as the market rumours, insisting it has not made a decision yet.

Its ruling, based on whether a takeover would benefit Canada, pits the Conservative government’s pro-business, free-trade philosophy against hard political realities. The deadline is Wednesday at midnight (4 a.m. British time November 4).

The government of Saskatchewan, Potash Corp’s home province, opposes a BHP takeover and has demanded that Ottawa block the hostile bid. Saskatchewan is a bastion of Conservative support that Prime Minister Stephen Harper would risk alienating if he allows the bid to go forward.

Ottawa’s decision is to be delivered by -- is the first of several hurdles that BHP would have to clear before it is able to acquire its target.

Here are some of the scenarios that might unfold:

CANADA ALLOWS BHP’S BID

This scenario would likely drive Potash Corp’s shares higher, as it would increase the chances of BHP prevailing, probably with a sweetened bid.

BHP shareholders would likely react negatively, putting downward pressure on its shares on concerns it would have to pay more to win over Potash shareholders.

A “yes” ruling would remove the most significant barrier to a takeover, though BHP would need to clear other hurdle.

BHP has offered $130 a share for Potash Corp. The current stock price is well above that -- around $145 on Tuesday.

PROBABILITY: This outcome is likely if the government takes a long-term view and decides business interests are more important than short-term political considerations.

CANADA BLOCKS BHP’S BID

Analysts believe a government veto would lead to short-term weakness in Potash’s shares, as arbitrage traders exit the stock.

But that may present a buying opportunity. The shares are expected to bounce back and rise above $150 given the strength of the global agricultural markets. Those fundamentals are one of the main reasons BHP has coveted Potash Corp.

If Canada blocks BHP, its stock is likely to post immediate gains, as concerns fade that it might eventually pay too much for Potash’s assets.

PROBABILITY: This scenario is possible, assuming that Harper’s government views its own political survival as paramount.

Saskatchewan Premier Brad Wall, who says Potash Corp is a strategic resource, has mounted a strong campaign. He has said four of the other 10 provinces -- Alberta, Manitoba, New Brunswick and Quebec -- share his concerns.

While the concept of a “strategic resource” does not appear in the Investment Canada Act, the legislation that governs foreign takeovers, the government could conclude that the political risks are too high for it to approve the deal.

Alberta, Manitoba and Saskatchewan alone account for 48 of the 142 seats the Conservatives hold in the House of Commons, and if the minority government loses even some of those seats in an election expected early next year, it could lose power.

If Canada blocks the bid, BHP has the right to submit a modified proposal. But it is unclear if the company would do so, given that it has worked closely with Ottawa and already understands the government’s position.

CANADA ALLOWS BHP’S BID WITH CONDITIONS

This scenario’s impact would depend on the kind of concessions that the government is seeking and whether the conditions are tough enough to scare BHP off.

If too onerous, BHP could walk away and its stock would rise. Potash Corp would likely drop but quickly rebound on the market fundamentals.

PROBABILITY: This is a possible compromise solution. Allowing the bid with conditions would allow the government to keep its pro-business credentials while taking political realities into account. Ottawa, for example, could oblige BHP to maintain employment and output at certain levels.

Ottawa could also add restrictions tied to the future of Canpotex, the international marketing arm of Potash Corp, Mosaic Co and Agrium Inc. BHP has said it may exit the consortium if it takes over Potash, while Saskatchewan sees Canpotex’s control over supply as crucial for maintaining its royalty revenues.

Opposition legislators see problems with allowing the bid with conditions, saying that other foreign companies have broken promises they made under similar circumstances.

OTHER HURDLES

Assuming the government approves the deal, or approves it with conditions, there are other barriers to overcome.

POISON PILL

Saskatchewan’s securities regulator on November 8-9 will hear BHP’s appeal against Potash Corp’s shareholders rights plan, or poison pill, assuming Ottawa allows a takeover.

BHP wants the regulators to force Potash Corp to scrap the plan, which has been in effect for more than two months. It says the pill is appropriate only as a temporary measure to give a target company time to find an alternative offer. It says the plan is not a long-term measure to be used to block a takeover.

At the hearing, Potash will have to reveal how many companies have signed confidentiality agreements and whether there’s a reasonable prospect of any of them coming up with a superior bid.

PROBABILITY: The tiny Saskatchewan regulator has no experience with huge takeover proposals. But if it follows precedent from elsewhere in Canada it will order Potash Corp to abandon the plan, allowing the bid to proceed.

LEGAL BATTLE

The two companies are due to face off in Chicago on Thursday in a court hearing on Potash’s request for an injunction to block BHP from closing its tender offer.

If granted, the injunction could stall BHP’s bid until early 2011 and give Potash Corp more time to find a competing bidder, or structure an alternative transaction.

PROBABILITY: A delay is possible, but U.S. courts typically leave such decisions to shareholders.

COMPETITION BUREAU

The Canadian Competition Bureau is set to rule on November 12, on whether BHP’s bid raises antitrust concerns. This is entirely separate from the Investment Canada Act decision.

PROBABILITY: It is unlikely that BHP’s bid will falter at this hurdle, as the company currently has no producing potash operations and its Jansen project in Saskatchewan is still years away from completion.

SHAREHOLDER VOTE

BHP’s current offer of $130 a share has been labelled as a “nonstarter” by Potash Corp, its investors and by industry analysts. The stock has been above that level ever since BHP entered the fray. Potash Corp shares were trading at $144.86 in New York on Tuesday afternoon.

BHP will have to raise its offer to win over Potash Corp shareholders. Under UK law, it would have to put a deal before its own shareholders for approval if the value of any new offer exceeds 25 percent of its own market capitalisation.

BHP’s market cap has risen roughly 15 percent since it launched the bid in August. That means now the miner has more leeway before it crosses the threshold requiring a vote.

PROBABILITY: There is already talk that BHP will raise its bid. But a source familiar with the situation says the company feels no pressure while regulatory issues are still pending.

(Editing by Frank McGurty)

Additional reporting by Pav Jordan

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