THE TAKEOVER BID: THE DEAL THAT WASN’T

Janice MacKinnon

In its hostile bid to take over PotashCorp of , the Australian mining giant BHP Billiton failed to understand that potash was seen by the province as a strategic resource whose development had to bring fiscal and economic benefits. The ill-fated takeover bid also revealed the shortcomings of relying on a company’s commitments; as Premier said, “Promises don’t build schools.” Janice MacKinnon takes us inside a deal undone, the biggest Canadian business story of 2010.

En tentant de prendre le contrôle de PotashCorp, société minière de la Saskatchewan, le géant australien BHP Billiton n’a pas compris que la potasse constitue pour la province une ressource stratégique dont l’exploitation doit produire des avantages économiques et financiers. L’échec de cette offre publique d’achat hostile a aussi montré qu’on ne peut se fier entièrement aux engagements d’une entreprise. Comme l’a dit le premier ministre Brad Wall : « On ne construit pas d’écoles avec des promesses. » Janice MacKinnon nous fait revivre le feuilleton de l’année dans le monde des affaires.

he major role that potash plays in Saskatchewan pol- tive of the potash companies, they owned the companies itics was evidenced in 1975 when my husband, and therefore had the right to develop the resource so as to T Peter, and I were moving to the province: as soon as maximize their profits. That view overlooked the long pub- our car crossed the Manitoba-Saskatchewan border the radio lic battles that had occurred in Saskatchewan and Alberta was virtually saturated with industry ads condemning the over natural resources. When the provinces were created in recent decision by the government of Premier Allan 1905 they were not given control over their natural Blakeney to nationalize potash companies. The issues at resources and won that control only in 1930 after a long stake in the 1975 dispute between the potash companies public battle with the federal government. Hence, and the Blakeney government help to explain why the cur- Saskatchewan governments of all political stripes have rent Saskatchewan government of Premier Brad Wall reject- taken the position that natural resources like potash belong ed the hostile bid by Australian mining giant BHP Billiton to the people of the province and when they are depleted (BHP) to take over PotashCorp of Saskatchewan (PCS). And the companies have to pay fair compensation to the govern- the decision by the federal government to deny what would ment (royalties and taxes) to help finance social and other have been the largest takeover in Canadian history raises programs. Also, Saskatchewan governments have seen interesting questions about the issues that need to be resources like potash as strategic assets that have to be devel- addressed when future takeovers are considered. oped in ways that advance the government’s overall eco- The immediate issue in the 1975 dispute was taxation. nomic development objectives — in the 1970s diversifying The potash companies opposed the government’s new the economy beyond agriculture — and to do so govern- reserve tax but refused to “open their books” to show why ments have to play a role in setting the framework for the tax was too onerous. Instead, they threatened to close resource development. mines, which would result in layoffs and revenue losses to The 1975 dispute also showed the extent to which private the government; they launched court action and they companies could effectively undermine the province’s power engaged in a very high profile and costly public battle with to control the development of natural resources by closing the government on the eve of the 1975 provincial election mines and taking on the government in the political realm. (the government was re-elected but lost seats). Gridlock and the layoffs and revenue losses that would result The underlying issue was conflicting views about the would be significant problems for any government. role of government and the private sector in the develop- Nationalizing potash was controversial; however, it did ment of Saskatchewan’s natural resources. From the perspec- consolidate a major part of the industry in one company,

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and when PCS was privatized in the Board of Canada, in a study commis- ways that were consistent with the 1980s it continued to operate in ways sioned by the Saskatchewan govern- overall fiscal and economic needs of that were consistent with the overall ment, ran a “high-production” the province. Oblivious to the gather- fiscal and strategic interests of the scenario and concluded that it posed a ing storm clouds, Billiton proceeded province. The provincial objective of “serious risk to the province” and on its assumption that once it owned maintaining a fair and reliable return would cost the province $5.7 billion in PCS it would develop the resource in a to taxpayers from the mining of taxes and royalties over a ten-year peri- way that met the company’s objec- potash was met by PCS’s support for od. The cost of withdrawing from tives, with little concern for the fiscal , the consortium that mar- Canpotex would reach beyond and economic interests of the kets, transports and sells the potash Saskatchewan’s borders. Rather than province. produced by PCS , Agrium and Mosaic, using the infrastructure established by In retrospect, the turning point in the ill-fated bid occurred on Had the leadership of BHP studied the politics of potash in September 20, about one Saskatchewan it might have avoided the serious strategic month after the takeover mistakes that cost it the support of the Wall government for attempt became public, when Premier Wall had his its takeover bid. first face-to-face meeting the two other potash companies in the Canpotex to move potash by rail to with BHP’s CEO, Marius Kloppers. The province. As the dominant player in British Columbia ports, BHP proposed delay in meeting with Wall can be the industry, PCS in conjunction with to use American port facilities. explained by several factors. Kloppers Canpotex and the other potash com- The Conference Board study also and his team had focused on the feder- panies has acted as a “swing producer” quantified the other costs to the al scene, assuming that the decision on in the marketplace, with the goal of province of the proposed takeover. the takeover would be made by restricting supply when necessary to BHP had already done preliminary Investment Canada and the Prime minimize price volatility and keep work on a new mine, Jansen Lake, and Minister’s Office. Moreover, the low- prices as high as possible. the capital costs of that mine could be ball bid of $130 per share infuriated Had the leadership of BHP studied written off against current income PCS, which launched court action the politics of potash in Saskatchewan generated by PCS properties at an esti- against BHP in the United States and it might have avoided the serious mated cost to the Saskatchewan an aggressive campaign against the bid strategic mistakes that cost it the sup- Treasury of $200 million per year. in Canada. Thus, Kloppers and his port of the Wall government for its These initial costs would be offset by team were preoccupied by selling its takeover bid. Of critical importance is the construction and operation of the bid proposal to federal officials and the fact that the Wall government has Jansen Lake mine, but the benefits PCS shareholders, and they failed to repeatedly declared that Saskatchewan would not be fully realized until after consider the role that might be played is open for business; it has assiduously 2020. As well, BHP could deduct its by the province. pursued opportunities to develop and debt servicing costs for the PCS acqui- diversify the economy of the province, sition against the taxable income of t the September 20 meeting the and its initial reaction to the proposed PCS operations, resulting in lower fed- A province needed to get reassur- takeover ranged from neutral to posi- eral and provincial corporate tax. In ances about the potentially negative tive. For a government focused on total, the losses to the Treasury from fiscal implications of the proposed economic development, the proposed the takeover were estimated to be takeover and it had to find other eco- takeover was seen as an opportunity, equivalent to about 7 percent of the nomic development opportunities and some government ministers open- province’s annual revenue that could justify the change in potash ly supported the principle that the The problems associated with ownership. Kloppers was not able to takeover decision should be made by BHP’s position that it would withdraw satisfy the province on either count. the marketplace, not the government. from Canpotex were compounded Hence, after the meeting, the premier Whatever enthusiasm the govern- when the company missed a clear sig- stated that he did not believe that the ment may have had for the takeover nal from the Saskatchewan govern- proposed takeover would meet the began to wane when the leadership of ment. The day after BHP officials Investment Canada test of providing a BHP stated that it intended to with- stated their reluctance to join Canpo- “net benefit.” draw from Canpotex, raising the tex, Premier Brad Wall expressed the In September 2010 the underlying prospect that the company would government’s strong support for Can- issue was the same as it had been in adopt a high-volume strategy that potex. The signal was that the govern- 1975: differing views of the role of would lead to lower and more volatile ment saw potash as a provincial government in the development of prices for potash. The Conference resource that had to be developed in Saskatchewan’s resources. In his

50 OPTIONS POLITIQUES DÉCEMBRE 2010-JANVIER 2011 The potash takeover bid: The deal that wasn’t

Jason Ransom, PMO Saskatchewan Premier Brad Wall and Prime Minister Stephen Harper in the replica of John Diefenbaker’s Ottawa East Block office at the Diefenbaker Canada Centre at the University of Saskatchewan on September 9. Wall campaigned hard against BHP Billiton’s $38-billion hos- tile takeover bid of PotashCorp, and at the end of the day Harper agreed with him, as Ottawa killed the deal on November 3. statements about Canpotex, Kloppers province would consider levying a ory, the province had extensive power revealed his view that once PCS was potash takeover tax that would have over resources, but in practice what purchased, BHP would run the compa- the effect of recouping all of the rev- would happen if a huge multinational ny and develop the resource according enue losses projected in the giant like BHP decided, as the much to its own corporate interests. Wall, on Conference Board study. Out-of- smaller potash companies had in 1975, the other hand, saw potash as a province editorialists and even the to “go on strike” to force the govern- provincial resource that had to be Conference Board authors argued that ment to withdraw its onerous new tax? developed in ways that would bring a the province could use its extensive The prospect of gridlock with shut-in fair and consistent return to taxpayers powers over natural resources, includ- mines, layoffs and lost government rev- and advance the province’s overall ing levying taxes, to offset any nega- enue was a real and daunting possibility. economic development objectives. tive impacts of the takeover. This As provincial opposition to the argument was used by many who sup- takeover bid mounted, Kloppers and his s the distance between the two ported the takeover bid. team tried to reverse course and give A sides widened, the premier stated But those who remembered the the province the reassurances and that if the takeover proceeded, the 1975 dispute were less sanguine. In the- promises of concrete net benefits that it

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had been seeking in the September 20 icon MDA, makers of the Canadarm, On November 3, the federal govern- meeting. If the takeover proceeded, to a US bidder on the grounds that ment announced its decision to prevent then BHP promised that it would Canada would be losing control of the hostile takeover of PCS by BHP remain in Canpotex for a period of time technology it created. In essence, the Billiton. Obviously the fact that the and it would structure its company so government invoked the national Conservative government stood to lose as to minimize the tax losses to the interest. some of the 13 seats out of the 14 seats in province. These commitments along In the case of the Potash takeover Saskatchewan was a major consideration. with the company’s previous promises bid, the heart of the problem was that I also think that it would have been diffi- cult for Prime Minister In urging the federal government to stop the takeover, Wall Stephen Harper to overcall a made the case that potash is a strategic resource. In a world provincial government that with a declining amount of arable land and a growing had done its due diligence and was asserting its power to number of people eating high-protein diets, potash, as an develop its natural resources essential ingredient in , is critical to the world’s future in a way that was consistent food supply. with its best interests. Being from Alberta he would under- to move head office jobs to the governments had no effective remedy, stand the importance of respecting the province and make significant other beyond court action, to ensure that rights of provinces to control the develop- investments sounded attractive at face promises made were promises kept ment of their natural resources; he was, it value. But the new commitments were and, as Premier Wall put it, “Promises must be remembered, a strong opponent not enough for a government leery of don’t build schools.” of the National Energy Program, and the promises made in desperation and fully fact that Alberta was the first province to aware of the problems involved in n October 21 in a speech to a support Saskatchewan’s position would enforcing such promises. O Regina business group, Premier have been noticed by the prime minister. The single biggest commitment Wall outlined the reasons why his gov- The fact that former Alberta premier Peter BHP made was to build a massive $12- ernment opposed the proposed Lougheed publicly supported Wall is not billion new mine at Jansen Lake. takeover of PCS. He argued that the insignificant, either. A respected figure in However, when pressed by the federal takeover would result in job and rev- western Canada, and the elder statesman government to give a firm commit- enue losses that were up front and sub- of Alberta Conservatives, Lougheed’s ment that the mine would be con- stantial, while the benefits were elusive intervention would not have fallen on structed, the company quite rightly and in many cases unenforceable. In deaf ears with the prime minister. argued that sound corporate gover- urging the federal government to stop nance required that its board of direc- the takeover, Wall made the case that here were sound policy reasons why tors had to approve the mine and also potash is a strategic resource. In a world T the governments of Saskatchewan had to reserve the right at some future with a declining amount of arable land and Canada opposed the takeover of PCS. date to cancel the project if the eco- and a growing number of people eating At the same time, the decision to reject nomics were no longer positive. Yet, high-protein diets, potash, as an essen- the bid has raised important questions from the point of view of govern- tial ingredient in fertilizer, is critical to that justify a review of Canada’s policies ments, how could a project that the world’s future food supply. on foreign takeovers. Canada needs more depended on such contingencies be Saskatchewan has more than 50 per- clarity and transparency in its rules with considered a net benefit? Moreover, cent of the world’s known reserves of respect to foreign takeovers. The case of other takeovers had been approved by potash and there is no other resource potash also raises the important issue Investment Canada on the basis of in which Canada is in such a dominant about the role that should be played by promises or commitments that failed global position. The proposed takeover provinces when the takeover involves a to materialize, particularly in the would mean transferring 25 to 30 per- natural resource company. Finally, a criti- mining sector. Indeed, since the cre- cent of the world’s known reserves of cal issue that has to be addressed is how to ation of Investment Canada in 1985, potash from a company that specializes assess net benefits, when many commit- the successive Mulroney, Chretien in potash and fertilizer to a company ments made by companies cannot be and Martin governments never that has 100 different mines in 25 enforced by governments. turned down a single takeover bid. countries and for whom potash would The first rejection of a takeover represent only 20-25 percent of its busi- IRPP Board Chair Janice MacKinnon is a occurred in 2007, and it was the cur- ness. He wondered aloud, “Will potash professor at the University of rent Conservative government that become a loss leader for a company Saskatchewan and a former provincial turned down the sale of aerospace that has other things to sell?” finance minister in Saskatchewan.

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