Spreading political fertilizer - Macleans.ca
 

Spreading political fertilizer

In opposing the Potash Corp. takeover, is the province protecting Canada’s interests, or its own bottom line?


 
Spreading political fertilizer

The deal will cost Brad Wall's government $200 million a year | Darryl Dyck/CP

Saskatchewan, says its premier, Brad Wall, is in the world spotlight. “If you were watching the Google trends back in August,” he said at an Oct. 21 speech in Regina, “when the BHP Billiton hostile takeover story broke, you would have seen a real spike in terms of the number of stories with the word Saskatchewan. In fact, we broke our own record in terms of the number of media stories around the world involving the word Saskatchewan.”

The previous record, he added sheepishly, was set after the province’s beloved Roughriders lost the 2009 Grey Cup by having 13 players on the field for a key play. “So there have been some unintended benefits to all of this.”

Not everyone is so sure that attention is a good thing right now, as Wall strives to block the hostile takeover of Potash Corp. of Saskatchewan (PCS) by the Anglo-Australian mining giant. BHP Billiton would derive a bonus from the deal, since it is already building the world’s largest potash mine near the village of Jansen, 150 km east of Saskatoon. The first ore from the site is not expected until 2015 at the earliest, but with BHP and PCS merged, the new company could immediately subtract the capital costs of Jansen from royalty payments that PCS mines are currently contributing. Moving forward, that writeoff is expected to save BHP and cost the Saskatchewan treasury about $200 million a year over the next decade.

Coach Wall’s 13th man is federal Industry Minister Tony Clement, who could use the Investment Canada Act to block the takeover—although that power has been exercised only once in the act’s quarter-century history. Clement’s decision is due Nov. 3. In his Oct. 21 speech, Premier Wall, signalling frantically to Ottawa, glossed over the royalty impacts of the takeover and focused on other issues—the (negative but much smaller) corporate tax revenue effects of the deal, the strategic nature of potash as a “food security” resource, and the effects on the company’s Canadian competitors in the potash market, Mosaic and Agrium. The royalty problem had suddenly dwindled to a footnote.

That’s probably no coincidence. The Investment Act permits the federal government to review takeovers for “net benefit” to Canada. But “net benefit” has a specific itemized definition under the act, a definition consisting of industrial-planning and national-competitiveness criteria. A takeover could be blocked if it hurt Canadian labour productivity or consumer choice, but it’s not clear that anything in the act allows Clement to use it to protect Saskatchewan’s budget balance.

Potash Corp. was privatized by the Saskatchewan Conservatives in 1989. That exposed it, practically by definition, to the possibility of takeover. The royalty regime that is providing incentives for BHP Billiton to swallow PCS was introduced by the New Democratic government that followed, and tweaked further by Wall’s administration. BHP’s investment in Jensen will go ahead with or without a takeover deal, but most economists would say the royalty structure is doing exactly what it was intended to—rewarding investment in Saskatchewan.

Just ask the economist who researched the deal on Saskatchewan’s behalf for the Conference Board of Canada. “I don’t understand why Saskatchewan is doing this,” admits Michael Grant, lead author of the Conference Board’s report on the takeover’s effects. “Its leadership realized, even under the NDP, that they’re competing against Alberta and that they needed a more competitive resource-royalty regime. Lo and behold, it worked. Now they’re waxing indignant about an artifact of their own system.”

The board’s report is emphatic: “Formal provincial opposition to the acquisition of PCS by a private resource company would be seen as undermining the rights of shareholders to sell their PCS shares to the highest bidder.” So why is Wall fighting the takeover? At the very least, shouldn’t it have been a foreseeable consequence of PCS privatization and Saskatchewan royalty rules?

The premier says no. “I don’t know if you can structure your tax regime based on the off-chance that the world’s largest fertilizer company, a company apparently without natural predators, would find one in the form of the world’s largest mining company,” he says. “This would be the largest corporate takeover in Canadian history. We’re content, and I think the facts show, that our royalty incentive plan has been a success in Saskatchewan. We’re glad BHP Billiton sees Saskatchewan as a good place to do business. But we’re required to look at the net benefit of any deal.”

Clement, however, has other industries and other provinces to consider. Ottawa’s reluctance to use the Investment Act to jostle foreign investors has made Canada a net capital exporter, and more than half of the world’s mining companies are registered on either the Toronto Stock Exchange or the TSX Venture Exchange. The industry minister is likely to hesitate over the “benefits” of adding an implied provincial veto, and a heavy helping of politics, to the country’s foreign investment review apparatus.


 

Spreading political fertilizer

  1. That's why it makes sense to have a little flexibility built into your rules for exceptional cases. Something the ideologically hidebound don't seem to understand.

    A few, exceptional cases to not vitiate the general rules or underlying free trade principles.

    • That's kind of where I've come out on this. This takeover was also fairly unique in that, despite all the jostling, not a single actual alternative bid was made. BHP's original bid was the only one that was made, AND as a result, BHP never had to raise its original bid. Talk to any M&A lawyer or professional, and they'll tell you that that's extremely rare in the case of hostile takeovers. This really was a rather unique situation, partly so because of BHP's very size.

      • Maybe the first offer, BHP's, was better than anyone else could imagine offering. In which case, the gov't has cost PCS shareholders quite a bit.

        • How so? The price is currently much higher ($141) than what BHP offered ($130).

          • So the shareholders don't have to sell, then, at that $130 price.

    • It is not ideologically hide-bound to simply admit that one does not know whether or not a takeover is a good thing. I have no idea whether the BHP bid was good for Canada or not. Neither did any politicians. Neither do Potash Corp's shareholders. The best we can do in such circumstances is let the shareholders decide what to do with their company. Not because shareholders know better. As I said, they likely don't. But because the rest of us don't know better either, so imposing a decision on them makes no sense.

      It's not ideologically hide-bound so much as it is a first do no harm principle. If no one knows the outcome, no one should be imposing a decision on a private business transaction. It isn't a blind adherence to the free market either. The free market produces plenty of colossal blunders. But those blunders are not lessened in an significant way by arbitrarily deciding who can and can't be taken over by foreigners.

      If Investment Canada developed a "net harm" test instead of a "net benefit test", the takeover would have been approved almost for sure. Because any net harm or net benefit are nearly impossible to predict. Therefore, the default would be one of non-interference.

  2. It's only slightly more than 50% foreign owned. What the media scarcely mentioned was that it is currently headquartered in Chicago, and that BHP planned to repatriate the headquarters to Saskatoon. The same folks who constantly cry about Canada's lack of head offices openly agitated for a decision that would block the repatriation of a corporate head office. Kind of characteristic of this whole debate. Conservatives as interventionist economic nationalists? Left-leaning Canadians as advocates of shareholder value? Left-leaning Canadians supportive of a corporation remaining headquartered in Chicago as opposed to returning to Saskatoon? Talk about bizarre circumstances. Such is the nature of discussion when misinformation and emotive reasoning are allowed to dictate the terms of debate.

  3. None of our resources should be for sale. There is a huge demand for potash around the world. The income stream for Canadians is almost endless. Actually the better question is how of Canada is still within Canadian hands? Then, how quickly is it being bought when no one is looking.