Tags: BHP, BHP Billiton, China, Citigroup, Deutschbank, M&A, Potash, Vale

China Steps Up Effort to Derail BHP Bid for Potash

By , Contributing Writer, Money Morning •

China is attempting to derail BHP Billiton Ltd's (NYSE ADR: BHP) bid for Potash Corp. (NYSE ADR: POT), as Beijing frets over the long-term supply of resources, according to a report yesterday (Wednesday) by the Financial Times.

Fearing that it could have a negative impact on Chinese imports, the state-run Sinochem Group has hired Deutsche Bank AG (NYSE: DB) and Citigroup Inc. (NYSE: C) to help disrupt BHP's bid for the fertilizer company, people familiar the matter told the FT. A Chinese bank, thought to be Industrial and Commercial Bank of China, was also part of the team.

Citigroup, which acts as joint corporate broker to BHP along with Bank of America Corp.'s (NYSE: BAC) Merrill Lynch unit, has asked to be relieved of its role in BHP's bid in order to advise Sinochem on a potential counter-bid.

BHP has responded by hiring three high-powered former advisers to Canadian prime ministers to lobby legislators in its campaign to acquire the fertilizer giant, Bloomberg News reported.

Potash, the world's largest producer of potash - a mineral that is refined into fertilizer and used to enhance crop yields - initially rejected the unsolicited takeover bid of $130 a share calling the offer "grossly inadequate."

The fertilizer company also quickly adopted a so-called poison-pill defense to fend off would-be suitors, though it said it would be open to a transaction if the price were right. Potash stock dropped 1.3% to $150.55 in trading yesterday, 16% above BHP's offer.

Almost as soon as BHP announced its $39 billion hostile bid on August 15, the Chinese government encouraged Sinochem to "take an interest" in Potash, a person familiar with the matter told the FT.

The Sinochem Group controls almost all potash imports into China through its subsidiary, Sinofert.  PotashCorp owns a 22% stake in Sinofert.

China is the world's largest importer of potash. Beijing's latest move is the strongest sign yet of its concern that a successful BHP acquisition could have long-term implications for its food security.

Joining the contest for Potash may indicate China's desire to stop BHP from controlling more valuable commodities after years of escalating tensions over iron ore prices.

BHP and Vale SA (NYSE ADR: VALE), the world's largest iron ore producer, in March signed short-term contracts for record prices with Asian steel mills that effectively scuttled a 40-year-old system of setting prices annually.

China considers access to resources a matter of national security and the growing clout of global iron ore miners, including BHP, has been a matter of serious concern to Chinese officials.

A Chinese counter-bid for Potash could be motivated by the need to secure long-term supplies of fertilizer, as well as an overarching desire to prevent BHP from expanding its reach.

Sinochem, which was founded in 1950 to import oil and chemicals, has a mandate from the government to make "the greater good of the national political stability, economic development, and social progress," its highest priority.

Rather than launch a full takeover, Sinochem could offer to take a strategic stake in Potash in the hopes of easing concerns about the Chinese company's role in the takeover battle, sources told the FT.

Canadian lawmakers have called on the government to establish conditions for any foreign acquisition of the Saskatoon, Saskatchewan-based company.

BHP, based in Melbourne, had no active lobbyists registered with the Canadian legislature until last month. BHP Chief Executive Officer Marius Kloppers was scheduled to be in Ottawa for meetings with lawmakers yesterday.

"I'm obviously anxious to understand completely and fully the type of proposal they are making," Ralph Goodale, deputy leader of the main opposition Liberal Party and his party's only legislator from Saskatchewan, told Bloomberg in a telephone interview.

"They have an extensive public outreach and communications campaign under way in Saskatchewan," he said.

Foreign takeovers of major Canadian companies are automatically reviewed in Canada under the Investment Canada Act, which gives the government power to block any transaction if it finds insufficient "net benefits" to the country.

"This government's position has not been to give a blank check to foreign takeovers," Prime Minister Stephen Harper told lawmakers in Parliament yesterday. "There is a law in place."

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