Monday, November 15, 2010

Protecting Potash From Itself

By Eric Jackson
RealMoney Contributor

11/15/2010 5:00 PM EST
Click here for more stories by Eric Jackson

BHP Billiton (BHP - commentary - Trade Now) pulled its offer for Potash (POT - commentary - Trade Now) yesterday afternoon and said it would spend $4 billion on stock buybacks. Investors, however, still believe a deal is possible. Shares of Potash dipped less than 2% to $137 on yesterday's news. The stock was trading at $111 prior to the buyout offer in August.

BHP certainly still has a lot of dry powder -- even after its commitment to spend $4 billion on buybacks at some unspecified. That's just 10% of the amount that the company was prepared to spend on its acquisition of Potash.

There are many merger arbitrage hedge funds still betting that a deal will go through. However, based on the Canadian government's rejection of the proposed deal a few weeks ago, I'm not so sure it will happen.

Many were surprised by this decision. Countless articles have pointed out that this was only the second time since the 1980s that the Canadian government has ruled out a proposed deal. However, there's been little analysis into why the deal was ruled out and what it might mean for future deals.

Industry Canada -- the Canadian equivalent of the Federal Trade Commission (FTC) -- has to sign off on any foreign buyout of a Canadian company. The organization actually green-lighted the BHP deal. It was the Minister of Industry, Tony Clement, who blocked the deal -- and it came down to politics.

The federal Conservatives have led the country -- fairly well when you consider Canada's position today relative to the rest of the world -- as a minority government for the last four years. They are widely expected to call another election in the next six months.

It became clear weeks ago that many Western Canadian business leaders weren't behind the BHP takeover. They basically didn't like the future it presented to many of them -- most of whom lead energy or agricultural companies that potentially could be attractive buyout candidates in the future. They have seen dozens of acquisitions of mid- to large-sized Canadian companies out over the last 15 years, and they have seen those companies basically become branch plants or branch resource locations (where key executives remain abroad and local Canadian jobs are lost). What's more, the key resources fall under the control of some foreign company.


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