Is Potash A Strategic Asset?--The Canada Question

The Canadian government has rejected an attempt by BHP Billiton (NYSE: BHP) to buy fertilizer company Potash (NYSE: POT). BHP has 30 days to try to change the government’s mind. That is unlikely to happen.

Tony Clement,  the Minister of Industry, said that the BHP Billiton unsolicited offer for Potash is not likely to be a net benefit to Canada within the meaning of the Investment Canada Act.  The government tried to soften the blow: “Canada has a long-standing reputation for welcoming foreign investment. The Government of Canada remains committed to maintaining an open climate for investment.” That does nothing to explain the decision. Sovereign nations,though, are not required to defend their actions.

The usual explanation given by governments when they block offers from foreigners to buy companies within their borders is that outside corporations should not own “strategic” assets essential to the local economy or national security. The US has blocked the sales of some technology and energy companies on this basis. It might be argued that high-tech assets are more a security risk when available to foreign companies than fertilizer.

It is difficult to argue that BHP is likely to act in a way that would be harmful to Canada. BHP is based in Australia, a major Canadian ally. BHP may sell fertilizer to Chinese companies, which would help the economy of the People’s Republic. Potash, however, is already active in the world’s most populous nation.

Potash is the world’s largest fertilizer company and it has unusual access to abundant Canadian supplies of potassium. That, in and of itself, does not make the company “strategic.” BHP has no plans to seize supplies, and, if it did, Canada could block the action.

One of Potash’s core principles is to enhance shareholder value. Potash traded for a little over $100 before the BHP bid.  BHP’s offer pushed Potash shares above $150. There is nothing in its earnings forecasts that indicates Potash shares will rise 50% based on its earnings power.

Potash shareholders should  question the basis of the Canadian decision. It is not as if fertilizer has much in common with the guidance systems of atomic weapons.

Douglas A. McIntyre