BHP Billiton’s proposed takeover of PotashCorp could reduce provincial revenues by at least C$2 billion over the next 10 years while having little or no net effect on employment in the industry, according to a report from The Conference Board of Canada, which was asked to do the study by the Province of Saskatchewan. The report, released Oct. 4, highlights a potentially positive impact from the repatriation of some PotashCorp head office jobs that have moved to Chicago.
After the report was released, Saskatchewan Energy and Resources Minister Bill Boyd said the potential revenue loss is concerning because changes to the royalty structure to mitigate the loss could have negative effects on the Saskatchewan industry and other potash companies. Boyd said the government would consider its findings in the coming days as the province prepares its views on the proposed transaction, to be provided to the federal government. “There are both pluses and minuses to this BHP bid,” Boyd said. “This report will help to inform our view of whether an ownership change represents a ‘net benefit’ to Canada and to the people of Saskatchewan.”
Regardless, Boyd has been quoted in the Canadian press that he believes there is no “net benefit” to Saskatchewan from the BHP acquisition.
Boyd restated the government’s position that no matter who owns the potash mines, the people of Saskatchewan own the potash. “From the outset, Premier Wall has said our government will protect the interests of Saskatchewan people,” Boyd said. “That will be our guiding principle as we deal with this matter in the days ahead.”
Sinochem larger concern than BHP, says report
The Conference Board report said Sinochem as a purchaser of PotashCorp is more of a concern than BHP Billiton. The report says Sinochem, a state-owned, consumer-driven entity, has a stronger incentive for lower potash prices than does BHP, which would be expected to seek an economic return.
PotashCorp responds to Conference Board report
PotashCorp responded to The Conference Board’s assessments of a possible BHP Billiton takeover of PotashCorp, saying the Board’s assumption of a C$2 billion loss of revenues for the Province of Saskatchewan over a ten-year period is understated. PotashCorp said the report chose to assume that BHP would not operate full out – in direct contradiction of previous BHP public statements – and that the revenue loss is unique to the BHP bid because of the company’s involvement in the Jansen Lake Greenfield project.
“The Board of Directors of PotashCorp would encourage the Government of Saskatchewan to continue to remain open to reviewing alternative bids on a fact-based approach, rather than the speculative approach taken by The Conference Board of Canada’s report,” said PotashCorp.
PotashCorp has told The Conference Board of Canada that the position it has taken is that all potential interested parties should commit to the following as a starting point, so that prospective Provincial resource revenues are not negatively impacted: support the sale of offshore potash through Canpotex; purchase potash on an arms-length basis for their own needs as a consumer; and support the continued profit maximization strategies employed by PotashCorp’s existing management, as well as the company’s ongoing capital expenditures for future potash expansions.
PotashCorp said that The Conference Board chose to ignore PotashCorp’s position in its report.
PotashCorp said it looks forward to Investment Canada’s review, which was extended Oct. 5 and will assess whether an acquisition of PotashCorp by BHP Billiton would comply with applicable Canadian law and federal government policies, including the requirements of the Investment Canada Act.
BHP touts Jansen jobs as it reacts to report
BHP also responded to the Conference Board report, issuing information that it said was not available in time for the report regarding BHP’s Jansen potash project. Taken from its environmental impact statement, BHP says Jansen’s construction phase will have a peak workforce of 4,200. On average during construction, the equivalent of 2,900 full-time jobs will be created in Saskatchewan from direct, indirect, and spin-off employment. BHP said these employees, and the companies that work with BHP, are likely to pay an average of C$280 million per year in federal and provincial taxes over the project’s construction phase.
Over the multi-decade operating life of Jansen, BHP expects to pay approximately C$90 billion in royalties and taxes to the municipal, provincial, and federal governments. Approximately 65 percent of such payments will be to the Government of Saskatchewan.
While The Conference Board notes that provincial tax receipts could fall initially as payments would be deferred while BHP offsets certain tax deductions related to the construction of Jansen against PotashCorp revenue, BHP notes that in future years when Jansen starts to operate and such deductions have been utilized, the reverse occurs and the Province will receive more taxes than it would have otherwise.
In addition, BHP believes that the additional corporate, income, and sales taxes paid by those building Saskatchewan’s first new potash mine in 40 years are likely to offset the deferred payments. The transfer of a large number of highly paid management jobs from Illinois to Saskatchewan is also likely to materially increase the Province’s tax receipts.
BHP files to dismiss PotashCorp lawsuit
As it promised earlier, BHP Billiton on Oct. 1 filed a motion to dismiss PotashCorp’s lawsuit, which seeks an injunction in BHP’s hostile takeover attempt. BHP rejects PotashCorp assertions that BHP has supplied PotashCorp shareholders with misleading statements and material omissions.
BHP said PotashCorp has only offered implausible, uncorroborated, and largely irrelevant speculation drawn from material in the public record, which shareholders are equally able to review in order to draw their own conclusions. BHP said it is only required to disclose material facts and to confess true motives.
It noted that PotashCorp has been telling shareholders there would be a competing bid for the company, but such has not been forthcoming.
As for PotashCorp assertions that BHP has been trying to depress PotashCorp stock prices, BHP said it did not pretend to enter the potash market, and that it spent some $1 billion to do so. BHP said this was not an elaborate ruse to depress the value of PotashCorp stock. It said there is no evidence that BHP will abandon its Jansen potash project, and that PotashCorp has only given the personal opinions of two analysts for this proposition.
As for what will ultimately happen to PotashCorp’s nitrogen and phosphate businesses under BHP, the company said that it is not required to disclose plans that are contingent or indefinite.
While BHP concedes that it would like to market its potash independently, it said again that this is another item that is not definite, citing Saskatchewan’s seeking of independent advice, as well as BHP having other partners in Canpotex.
BHP said PotashCorp is free to debate the status of arbitrageurs with fast money involved with PotashCorp versus the status of long-term shareholders. It noted that PotashCorp more than anyone should have knowledge of its shareholders. BHP noted that the article in which PotashCorp drew this concern itself said fast money involvement was limited. Regardless, said BHP, this matter should be left up to shareholders, not a federal judge.
Class action suit filed against PotashCorp
Three small PotashCorp shareholders filed suit against the company and its board of directors in the U.S. District Court for the North District of Illinois on Oct. 6 seeking injunctive and other relief, citing PotashCorp for materially false and misleading information in its recommendation statement against the BHP tender offer. The suit said defendants misled or omitted information pertaining to the poison pill, analysis of the offer, analysis by PotashCorp of strategic alternatives, financial analysis by financial advisors, and the standards used to conclude that the offer was inadequate.
Shareholder plaintiffs Richard and Susan Painter own 50 shares of PotashCorp stock, which they purchased when it was $194.08, while plaintiff Herbert Francl bought his 50 shares at $208.30.
Doyle makes case to continue as standalone entity
PotashCorp CEO Bill Doyle was quoted in The Globe & Mail Oct. 7 as saying PotashCorp should receive a price far exceeding $170 per share. “I can make a very, very strong case that the best choice that could be made will be that the company is a standalone entity because we are going to blow the doors off the $240 share price.” PotashCorp posted a price of $239.50 in June 2008 before the onslaught of the global economic crisis. He told the paper that PotashCorp is positioned for growth like no other company in the world.
Former PotashCorp Executive Vice President and Chief Operating Officer James Dietz apparently did not wait for Doyle’s higher prices. Bloomberg, citing data collection firm Washington Service, has reported that Dietz, who retired June 30, sold 210,000 shares of PotashCorp Sept. 1 at an average of $145.95, and another 168,756 shares Sept. 3 at around $148.00. These sales would have brought in approximately $55.6 million. Dietz also sold 50,000 shares prior to the BHP bid on Aug. 6 at an average of $102.00.