Study May Make BHP-Potash Deal Tougher

A widely anticipated study of the BHP-Potash deal, released Monday, could wield heavy influence on the Canadian government's approval.
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(BHP-Potash item updated with further information from the Conference Board report.)

NEW YORK (

TheStreet

) --

BHP Billiton's

(BHP) - Get Report

bid to acquire

Potash

(POT)

may have just grown a touch harder.

Not long after BHP's hostile pursuit came to light in August, the government of Saskatchewan commissioned a study to investigate what positive and negative impacts a BHP-Potash deal might have on the economy of the region -- a region that has come to depend on potash lucre for its fiscal quality of life. Potash is headquartered in Saskatoon, Saskatchewan. The province contains more than half the world's known reserves of this crucial crop nutrient.

The results of that study would then inform the

provincial Saskatchewan government's opinion

of a BHP buyout -- an opinion on which the federal authorities in Ottawa would, in turn, base their decision to approve, or shoot down, the big mining concern's plot to acquire Potash.

The essence of the 77-page report, released Monday morning and produced by a not-for-profit consultancy and think tank called the Conference Board of Canada, was this: "In the case of

BHP Billiton, with the exception of significant government revenue impacts, we found few negative takeover effects."

Of course, when it comes to governments, no other so-called "takeover effects" could possibly be as important as "government revenue impacts." The Conference Board estimated the loss at about 2 billion Canadian dollars over ten years.

Indeed, the Saskatchewan authorities reacted to the study by focusing on that $2 billion. In its press release announcing the report, the government called the potential revenue loss "concerning," though it stopped short of offering a clear opinion on the potential deal one way or the other.

But if the bottom line figures are any indication, BHP may have a more lobbying to do in the halls of Ottawa and Regina, Sasketchewan's capital.

Monday afternoon, Potash shares were rising 1.2% to $144.35, bucking a downward move in the broader equities market. Investors may have been gladdened that the Conference Board didn't suggest, after all, that a BHP acquistion of Potash would be a mistake.

According to the study, in fact, a BHP deal would be preferable -- from Saskatchewan's point of view -- to one made with

Sinochem

. The sprawling Chinese state-owned industrial conglomerate has long been cited as the likeliest potential rival to BHP for control of Potash.

Leaving aside the obvious political snares that would be unleashed by a Chinese government-owned entity making a move to acquire a Canadian natural resources concern, the Conference Board believes that a Sinochem-Potash deal would impair Saskatchewan's tax and royalty revenue even more than would a BHP acquisition.

That's because Sinochem (a proxy in this case for the Chinese government) would have more incentive than BHP to run Potash's mines at full capacity, bringing as much supply onto the global market as possible. The Chinese want cheap fertilizers to aid in the feeding of their increasingly middle-class billions. To do so, they may well have no compunction about undermining the global supply-demand balance long sought and maintained by the industry in order to protect their profit margins.

"We assume that Sinochem ... will not be guided by the same market discipline and profit motive as commercial players," the report said. "Obviously, the more Sinochem were to behave like a commercial owner, the less the risk would be for the province, and the better off the province would be."

BHP has indicated repeatedly that it, too, would run Potash's mines full bore, but many observers simply don't believe the company when it says this, the Conference Board included. The think tank ran the numbers, concluding that BHP's full-capacity claims aren't "realistic" since to do so would "likely result in falling pricings and a negative return on employed capital."

Provincial officials will have a press conference to discuss the report later Monday afternoon.

-- Written by Scott Eden in New York

RELATED STORIES:

>>Look for BHP to Pay Up for Potash

>>Potash Vs. BHP: The Fertilizer War From A to Z

>>Potash Stock: What Would It Be Without BHP?

>>Potash Sues to Block BHP Billiton's Bid

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