Troubles Mount in BHP and Potash Corp. Merger (BHP, POT, MOS, IPI, MOO)

Practically from the time of the announcement by BHP Billiton plc (NYSE: BHP) that it was offering $38.6 billion to acquire Potash Corp. of Saskatchewan Inc. (NYSE: POT), the provincial government of Saskatchewan has been leery of the deal. Earlier this month, the government issued a report that the proposed takeover would cut provincial revenue by at least $2 billion over 10 years.

The provincial government is expected to make its opposition to the deal official tomorrow, filing a report with the Canadian government declaring that the deal does not offer any benefit to the province and recommending that the acquisition be rejected.

Potash Corp.’s share price has soared to over $150/share on the offer of $130/share on the expectation that BHP or another bidder would have to sweeten the deal to acquire Potash Corp. Other potash producers, such as The Mosaic Co. (NYSE: MOS), Intrepid Potash, Inc. (NYSE: IPI), have posted solid share price gains as well. The Market Vectors Agribusiness ETF (NYSE: MOO), which includes 8% of Potash Corp. shares in its holdings, has posted a new 52-week high recently.

For its part, BHP has issued a “Pledge to Saskatchewan” that promises, among other things, to keep corporate headquarters in Saskatchewan, to maintain the existing relationship with the Canadian export firm, Canpotex, that markets and sells Canadian potash, and to continue to manage potash production to maximize profit for the province. The provincial government is not buying it.

The provincial government cannot, by itself, kill the deal, but by recommending that it be rejected it virtually forces the Canadian government to reject the deal as well. After all, it would be difficult for BHP to prove that the acquisition is a benefit to Canada as a whole if the affected province declares the deal not to be in its best interests. The Canadian government is scheduled to issue a ruling on the acquisition by November 3rd.

In the unlikely event that BHP wins approval, the company must still persuade Potash Corp. shareholders to accept the bid and convince foreign governments, including in the US and China, that the acquisition does not violate those countries’ anti-trust regulations. China has already indicated that it is not happy with the proposed deal.

Potash Corp. shares are down slightly in early trading today, while Mosaic and Intrepid Potash shares are up slightly.

Paul Ausick