BHP Billiton’s (BHP.NYSE, BLT.LSE, BHP.ASX) US$40 billion takeover bid for Canada’s Potash Corp of Saskatchewan (POT.NYSE) was never going to sell well in China. Chinese policy makers see self-sufficiency in food supply as a matter of national security and farmers depend on potash to increase crop yields; widespread overseas consolidation makes both nervous. In addition to the Potash bid, there are rumors of a merger between Russian potash suppliers Uralkali (URKA.LON) and Silvinit, and Belarus’ potash industry is already consolidating.
All of this pushes China toward the price-taking side of the agricultural commodity equation. As a result, Beijing has been trying to throw together a deal to scupper any BHP takeover, and has promised to review any bid under China’s Anti-Monopoly Law. Its reactions reflect misplaced paranoia more than business sense.
Sinochem (600500.SH), whose fertilizer unit Sinofert Holdings (0297.HK) is 22% owned by Potash Corp, has reportedly sought advisement from Morgan Stanley (MS.NYSE), HSBC (HBC.NYSE, HSBA.LSE, 0005.HK) and Citigroup (C.NYSE) on creating an investment package with cash from sovereign wealth fund China Investment Corp. It is also said to have asked for Beijing’s backing.
But China doesn’t need to panic. It is unclear whether anyone will take over Potash. The company doesn’t want to be taken over, and the Saskatchewan government doesn’t want it to be taken over either.
Then there is the price. Potash Corp has said BHP’s offer of US$130 a share is too low – analysts say the company won’t likely accept anything less than US$150 a share. At some point, the deal will simply become too expensive. This may not be a deterrent for Beijing – in matters of what it sees as national security, profit is a minor consideration at most.
But a more rational approach would acknowledge that China can’t stop the overall consolidation trend. Finding alternatives to potash would guarantee greater food security and could create greater profits down the road.
Fortunately, the process is already underway. China’s agriculture sector is increasing production of other fertilizers, mostly urea-based products, and domestic consolidation is already taking place. More advanced farming techniques may themselves reduce demand for inorganic fertilizer altogether. Even if BHP does succeed in its takeover of Potash, China’s population will not starve.