The Canadian provincial government of Saskatchewan will not support BHP Billiton's bid for Potash Corp., government sources said Tuesday.
Australia's BHP Billiton Ltd. launched a $38.6 billion takeover bid in August for the world's largest fertilizer company after Potash directors rejected its offer. The company hoped to profit from what it expects will be rising fertilizer demand in China and India. Potash, a key fertilizer ingredient, is critical to international food security.
Canada's federal government can block a foreign takeover if it's not a "net benefit" to Canada. The federal government has asked for input from the provincial Saskatchewan government, who sources say will not support the deal.
Canada's Conservative government is expected to listen to the provincial government, which is also led by a right-of-center party.
The sources spoke on condition of anonymity because they were not authorized to speak publicly on the matter.
A provincial government official said at the heart of "net benefit" calculation is the government being compensated for what it said would be $3 billion in lost revenue if the deal were to go through. The official said BHP offered a $370 million one-time payment into an infrastructure fund.
"This doesn't even come close to offsetting the province's revenue loss," the official said. "The position of the government of Saskatchewan is unchanged. The potash resource doesn't belong to any company. It belongs to the people of Saskatchewan. We will protect the economic and strategic interests of the people of Saskatchewan."
Saskatchewan Premier Brad Wall is scheduled to talk to the media on Wednesday morning and to announce the decision in a speech at the Regina Chamber of Commerce on Thursday. Wall publicly questioned whether a foreign takeover of Potash Corp. was good for his province or Canada last month.
BHP Billiton in a statement issued Tuesday noted the reports that the provincial government would oppose the deal. But the Australian company said it was "confident" it would address the province's concerns about revenue and eventually win the support of the federal government.
"Our focus continues to be on working with the Government of Canada and demonstrating the significant net benefits we can bring to the country," said Andrew Mackenzie, a top BHP executive who is the company's lead man on the bid, said in the statement.
"BHP Billiton is willing to commit substantial resources to a province and a country that it believes is a welcome place to invest," said Mackenzie. "We are ready to underline our commitment to Canada with substantial undertakings on jobs, taxes, investment and community spending that will create immediate benefits for the people of Saskatchewan and the nation more broadly."
Saskatchewan has over half the world's reserves of potash and Potash Corp. is one of the province's largest revenue-generating companies, accounting for 15 percent of its budget as recently as two years ago. The provincial government collects royalties from the resource.
Potash Corp. produces 25 percent of the world's potash supply.
As the world's population grows, more food is needed and more fertilizer to grow crops. Demand for potash, a potassium compound also used in industry, is getting a boost from the global economic recovery and rising demand from emerging giants China and India _ the main markets for potash, along with the U.S. and Brazil.
China has expressed unease that a BHP takeover of Potash might create a "potash monopoly" that would boost prices and hurt China. A Chinese state-owned company was said to be interested in making a rival bid but no other offer has surfaced.
Potash has called BHP's $130 a share offer wholly inadequate. Shares fell $1.93, or 1.35 percent, to $141.50 in after-hours trading on the New York Stock Exchange. Potash shares had soared to more than $230 just before the global recession hit in 2008.
A foreign takeover of the company would come just as Saskatchewan is starting to boom after suffering low growth and population loss for decades. Potash is the province's most prized resource and there are also concerns in Canada about foreign takeovers after previous resource deals led to broken promises about job guarantees and investment.
A spokesman for Industry Canada, the federal government department that examines the "net benefit" question, declined to comment, citing confidentiality provisions. Federal Industry Minister Tony Clement is due to announce a decision by Nov. 3.
Canadian opposition lawmaker Ralph Goodale, who represents a Saskatchewan district in Ottawa, said he'd be shocked if the federal government didn't support the province.
"It would be extraordinary and it would be a profound slap in the face to Saskatchewan if the federal government were to say yes after the Saskatchewan government has said no," said Goodale, who is the deputy leader of the Liberal party.
"This is the most profound commercial transaction ever in the history of that province and maybe indeed in the history of the country. For the federal government to thumb its nose at that would be a huge insult to Saskatchewan."
He added that approval of the bid would "reinforce the reputation that Canada has of being a pushover."
A Potash Corp. spokesman did not immediately respond to messages seeking comment.
The province's stance is yet another setback for BHP Billiton. BHP Billiton and Rio Tinto just scrapped plans for a $120 billion iron ore joint venture in the remote Outback after antitrust regulators in Australia, Europe and Asia opposed it or demanded changes. The global financial crisis also derailed a planned merger of the two companies.
A recent report by the Conference Board of Canada, which was commissioned by the province, said there would be few negative effects from a BHP takeover of Potash Corp.
But the report did caution that the province could lose between $2 billion and $5.7 billion in taxes and royalties over the next decade, depending on how much potash the company produces.
Montreal-based billionaire investor Stephen Jarislowsky, who is Potash Corp's third largest shareholder, said this week that BHP's bid is too low and should be rejected by Ottawa. He said Canada should avoid having another major company sold to foreign interests.
Prime Minister Stephen Harper's government blocked a U.S. company's takeover of the space and satellite division of MacDonald, Dettwiler and Associates Ltd., Canada's leading space technology firm, in 2008. It was the first time Canada has rejected a foreign takeover outright since the Canada Investment Act took effect in 1989.
But Harper's Conservative government is a staunch supporter of free trade and has allowed recent Chinese investment in Canada's oil sands sector.