Canada ready to rule on Potash takeover by BHP Billiton

Demand in potash soaring thanks to developing countries
Potash Corp
A pile of processed potash at a mine storage facility in Saskatchewan, Canada Photograph: David Stobbe/Reuters

Canada is poised to rule on whether to approve a £24bn hostile takeover of Potash Corporation by Anglo-Australian mining group BHP Billiton.

The takeover is part of an international struggle to secure global commodity supplies against a backdrop of soaring demand and population growth in emerging economies.

Potash Corporation, based in Saskatchewan, is one of Canada's largest companies and the world's biggest producer of potash, a key ingredient of food fertiliser. Demand for potash has leapt as countries such as China and India seek to boost crop yields to meet increased consumption, especially among a burgeoning middle class.

But the hostile bid for Potash by BHP, headed by South African-born Marius Kloppers, has run into opposition from Saskatchewan, as well as other Canadian state governments, who argue it is foolhardy to hand a fifth of global potash supplies to a foreign firm.

Now the ball is in the court of the federal government which must decide by midnight Canadian time today (4.00am GMT) whether BHP's move will be a net benefit to Canada and meet stringent foreign investment rules.

Reports from Canada have indicated that Ottawa could sanction the deal, but only if BHP agrees to spend billions on Canadian infrastructure projects to compensate Canada for lost royalty and tax payments.

Analysts say Canadian prime minister Stephen Harper is being pulled in different directions; protectionists argue it would be "criminal" to hand over one of the country's crown jewels to an overseas multinational, while champions of free trade fear that Canadian companies could face tit-for-tat measures when they seek to expand overseas if Harper blocks BHP.

"The devil will be in the detail," said one analyst, "if the strings attached are too stretching for BHP, it could affect to what extent it sweetens its offer; or whether it offers anything extra at all," he adds.

As potash prices have been heading north since BHP first tabled its hostile bid in August, brokers have argued BHP will have to raise its offer price to persuade 50% of Potash's shareholders to accept the deal.

City sources suggest Kloppers could offer 10% above the current price of $130 a share to a level nearer $145, although analysts at UBS argue BHP may have to go as high as $165; BHP's major shareholders intimate that would be too high.

BHP is determined not to overpay and can point to the fact that its bid is the only one on the table. China's Sinochem sought to enter the fray with backing from Canadian pension funds and Temasek of Singapore, but the Chinese were put off by a report from Saskatchewan that hinted a bid from a state-owned company would be unwelcome. The Canadians also said that as a consumer and a producer, it would be in Sinochem's interests to keep prices low, limiting the size of tax receipts.

Kloppers is betting an increasingly hungry world will pay dearly for potash as BHP makes its first major move into the global food industry.

With demand for grain rising and less farmland available per person, the need for fertiliser - especially potash - has never been greater. BHP's bid is not just an attempt to diversify: it is a major bet that rising food demand will cause a significant growth in the use of the fertiliser.

According to Potash Corp's website, more people are eating meat, and as incomes rise in developing nations, millions of people are switching from starch to protein-based diets. Every pound of beef requires seven pounds of grain to produce, and this has a substantial impact on demand, according to experts.