Third time unlucky as BHP drops $39bn bid for Potash Corp

The world's largest miner failed to win Canada's backing despite making more than $1bn in concessions. Nikhil Kumar reports
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The Independent Online

One failed deal may be regarded as a misfortune; three in as many years, however, could be seen as carelessness. When the chief executive of BHP Billiton, Marius Kloppers, faces shareholders at the annual meeting of the mining giant's Australian business in Perth this morning, he will be taking the stage after conceding defeat in his $39bn gambit to acquire Potash Corporation, the fertiliser giant based in the Canadian province of Saskatchewan.

BHP backed off less than a fortnight after Canada's industry minister, Tony Clement, said he was not satisfied that the transaction would be of "net benefit" to Canada, thus failing a key test under the Investment Canada Act. Mr Clement gave BHP 30 days to show otherwise but the miner decided at the weekend to throw in the towel. It said that while it believed that the deal would have resulted in "significant net benefit to Canada", it could not furnish the undertakings required to change the minister's interim stance.

The retreat follows BHP's failure to merge with Rio Tinto two years ago in what would have been the second largest takeover in corporate history. Unfazed, Mr Kloppers chose a different tack, attempting join forces with Rio in a vast iron ore joint venture – a move which also fell through earlier this year. The former was scuppered by sliding metal prices as the world slipped into recession in 2008. The latter, forged at the end of 2009, came apart in the face of regulatory objections.

The PotashCorp deal was unveiled in the summer. Bidding to cash in on the growth in world's food requirements, and thus in the demand for fertiliser, BHP said it was would pay $130 per share for the company, but the Canadian group's directors were not impressed and sought a higher price. Mr Kloppers decided to turn hostile and took the offer directly to PotashCorp shareholders.

All the while, market watchers remained on the lookout for potential white knights – rival bidders who might interpose themselves between BHP and PotashCorp. But hopes began to fade after the Chinese chemicals group Sinochem, which was seen as leading candidate for a counter-bid, was reported to have ruled itself out of the running.

Aware of potential regulatory hurdles, BHP burnished its bid by offering more than $1bn in concessions to win over the Canadian authorities. The undertakings ranged from spending $450m on exploration and development over the next five years, which would have been on top of the funds earmarked for BHP Billiton's own Jansen potash project in Saskatchewan, to an extra $370m on infrastructure in Saskatchewan and New Brunswick.

The miner was also prepared to make commitments on employment and local say in management, besides foregoing tax benefits and agreeing to stay a member of Canpotex, the marketing business jointed owned by Potash Corp and its peers Agrium and Mosaic, for five years. To soothe nerves about the potential for a volte face once the deal was done, BHP said it was willing to post a $250m performance bond to ensure its compliance with the undertakings.

But it was not enough, and following Mr Clement's interim finding earlier this month, BHP said it believed it would have had to make further concessions to continue with its offer, something which would have "conflicted" with its strategy and run "counter to creating shareholder value". "Unfortunately, despite having received all required anti-trust clearances for the offer, we have not been able to obtain clearance under the Investment Canada Act and have accordingly decided to withdraw the offer," Mr Kloppers said.

"We remain committed to Canada and we plan to develop a significant presence in the potash industry in Saskatchewan. As part of those plans, we will continue to progress our Jansen Project and other development opportunities."

Failure isn't cheap. Walking away from PotashCorp will cost BHP about $350m, which will be shown as an exceptional item in its interim accounts. Taken together with the money spent on the Rio merger and the iron ore joint venture, BHP has spent $875m on failed deals. Yet Mr Kloppers continues to command the support of shareholders.

"Marius continues to run the company in an extremely efficient manner," said James Bruce of Perpetual Investments, a top-10 holder of the miner's Australian stock. "The fact that he has been unable to consummate a couple of deals does not change our view on his ability to manage the company."

Investors should also be placated by BHP's plans to resume its shares buy-back programme, which was suspended following its offer for Rio in 2008. The move will unlock $4.2bn for shareholders, who could also be in line for higher dividends and further buybacks, analysts say.

Royal Bank of Scotland, for example, forecasts a dividend of 93 cents per share for 2011. That equates to about "$5.1bn, compared with an operating cash flow of about $29bn", the broker said. Given its resources – Goldman Sachs estimates a net cash position of about $3bn by the end of next year – the world's biggest miner could also turn its hand to another deal, though options appear limited now that Potash Corp is off the table. Analysts are eyeing opportunities in the oil and gas sector, an area in which the company remains a mid-sized player and is therefore unlikely fall foul of regulatory norms.

Australia's Woodside Petroleum, which has been seen as a potential target since Royal Dutch Shell sold part of its stake, and the US explorer and producer Anadarko Petroleum are among the most obvious candidates for a takeover, according to Liberum Capital. But even if BHP were interested, things may go quiet for a while, with RBS saying "any such transaction would likely be six months away to allow for adequate due diligence".