It was probably only a matter of time before China’s state-owned chemical company Sinochem walked away from trying to raise enough money to make an offer for Potash Corp. of Saskatchewan Ltd. (NYSE: POT). The $38.6 billion hostile offer from BHP Billiton plc (NYSE: BHP) still remains and with Sinochem out of the picture, Potash Corp. shareholders might view the BHP offer in a new light.

Ever since BHP’s initial offer in mid-August, which Potash Corp. dismissed as “grossly inadequate”, a Chinese buyer has always loomed on the horizon as a potential white knight. That was always no more than wishful thinking.

The Chinese government was never truly interested in getting into an offer for Potash Corp. because it was pretty clear that the provincial and national governments of Canada would reject any offer that would place the company under the control of a foreign government. For that matter, government officials aren’t all that thrilled with the possibility of a change of control to the Australians of BHP.

The Wall Street Journal cited unnamed sources as saying that Sinochem’s plea to the government has been “dead for five to six weeks.” That sounds about right.

In mid-September Caijing magazine reported that Sinochem had applied to Chinese officials for financial help with a bid for Potash Corp. The magazine pulled the story from its web site the next day, and no trace remains. At the time it seemed like the removal of the story was just another example of the Chinese wanting to avoid potential embarrassment in the event that a bid was made and rejected. In hindsight, the government probably had already told Sinochem to forget the whole deal. Later reports of Sinochem trying to put together a consortium were likely just window dressing to make Sinochem’s eventual withdrawal look like it was based on external conditions. For example, Sinochem could say that resistance from the Canadian government tilted the field against a foreign buyer and Sinochem decided to pull out.

With the Sinochem deal off the table, and no competing bids being rumored, one has to wonder if Potash Corp.’s stock price will fall from its current level of about $147/share to something more in line with the BHP offer of $130/share. On August 16th, Potash Corp. shares closed at $112.15; the next day, after BHP’s offer, the shares closed at $143.17. Any investor who paid more than $130/share is probably very unhappy today.

Paul Ausic

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