Oxstones Investment Club™By ANDREW ROSS SORKIN, NY Times,
The prospect that a group backed by China may make a takeover offer for the Potash Corporation of Saskatchewan that rivals a $38.6 billion hostile bid from BHP Billiton has Washington lawmakers, Canadian regulators and Wall Street bankers talking, The New York Times’s Andrew Ross Sorkin writes in his latest DealBook column.
The politically charged subtext is this: Do we really want the Chinese to control the company that has the largest capacity to produce fertilizer?
Forty-five percent of Potash’s production is sold to farmers in North America. The big worry, in part, is that the Chinese could seek to redirect that supply to China, starving other countries of a much-needed commodity.
Read the column here, or after the jump.
Worrying Over China and Food
By ANDREW ROSS SORKIN
Are the Chinese coming?
That’s the important question now being asked in Saskatchewan, a prairie province in Canada. It is also the question of the moment on Wall Street.
Saskatchewan is home base for the Potash Corporation, the fertilizer company. If you care at all about the future of the world’s food supply, you care — whether you know it or not — about Saskatchewan.
A consortium of state-backed Chinese companies and financiers may make a takeover offer for Potash that rivals a $38.6 billion hostile bid from BHP Billiton, and that prospect has lawmakers in Washington, regulators in Canada and bankers on Wall Street all talking.
The politically charged subtext is this: Do we really want the Chinese to control the company that has the largest capacity to produce fertilizer?
If that reminds you of 2005, when the China National Offshore Oil Company, or Cnooc, sought to buy Unocal, until an outcry from Congress stopped it, you would be right.
But that outburst of protectionism was only about the nation’s oil supply, and this would be about something much more vital, food: 45 percent of Potash’s production is sold to farmers in North America. The big worry, in part, is that the Chinese could seek to redirect that supply to China, starving other counties of a much-needed commodity.
Even for free marketers who say they believe that transactions should be able to cross borders without political constraints, the questions being raised in Saskatchewan and elsewhere are the ones that need to be asked.
Indeed, concern that politics may drive Chinese deal-making has grown amid recent reports that China has banned exports of rare earth minerals to Japan. Prime Minister Wen Jiabao of China has denied that the country has issued such a prohibition, but he acknowledged that the owners of rare earth metals may have halted shipments because of their own feelings toward Japan.
(At the same time, however, another Chinese deal announced on Monday — Cnooc’s $1.08 billion investment for a third of Chesapeake Energy’s oil and natural gas shale assets in Texas — is not expected to meet political resistance because the stake is passive.)
In the case of Potash, the Sinochem Group, China’s largest fertilizer company, has been exploring a possible bid, according to several media reports, and may win backing from funds like the China Investment Corporation.
“It seems fairly certain that even if Sinochem puts together a financing consortium, the underlying motivation would be to secure access to a key commodity,” the Conference Board of Canada wrote in a report about possible Chinese interest in Potash. “Food security is an overriding concern in China, arguably even more important than access to industrial materials.”
It is that kind of talk that has many analysts betting that the Chinese do not ultimately move ahead with an offer.
“We believe that any bid from a Chinese state-owned entity would likely face significant Canadian regulatory scrutiny,” Glyn Lawcock, an analyst with UBS, wrote in a note to investors.
Under Canadian law the deal would have to pass muster with the government through Investment Canada, which would need to rule that the deal was a “net benefit” to the country.
You might ask why BHP, the Australian commodities giant that is steadily cornering the market on a variety of commodities, is not facing the same sort of scrutiny.
True, some questions are being raised, but the “back up against the wall” feeling doesn’t seem to be nearly as pronounced with BHP as it is with a Chinese state-sponsored bid.
For Saskatchewan, the deal boils down to which buyer is more likely to try to keep the price of fertilizer high, therefore helping the tax base. Of course, that would also help keep food prices high, which would arguably be bad for consumers all over the world, from Canada to China.
But Saskatchewan may be more concerned about local tax revenue. The Conference Board report noted: “As a state-owned enterprise acting on behalf of consumers of potash, we assume that Sinochem has strong incentives for lower prices and that it will not be guided by the same market discipline and profit motive as commercial players,” noting that “China was one of the few countries not to cut potash production in 2009 in response to falling demand and prices.”
In the new world of mergers and acquisitions — one that turns China into a central actor — the highest bid may no longer be the ultimate criterion for accepting a deal or the test of whether the deal is a success.
“The Chinese could justify a takeover premium as a sort of insurance premium to prevent BHP from exercising similar market power in potash,” the board wrote. “Yet given the state-owned nature of Sinochem, it becomes unclear whether this would be a corporate counterstrategy or state counterstrategy.”
Tags: BHP, China, farming, fertilizer, Food, Food Security, Potash, Sinochem, state counterstrategy