The government said the deal would not benefit the country, delivering a major blow to BHP Billiton Chief Executive Marius Kloppers after the 2008 failure of a $120 billion-plus takeover of rival Rio Tinto and the collapse of a $116 billion iron ore joint venture with Rio earlier this year.
BHP investors are betting the Anglo-Australian miner will now return capital through a share buyback or expand its interests in oil and gas in an effort to put its growing cash pile to work.
While Canada gave BHP 30 days to come up with additional proposals that might make its offer for the world’s largest fertilizer producer more palatable, the chances of a successful modified bid appeared remote.
“Marius Kloppers is going to be pretty frustrated. BHP is of a size now where just about anything it wants to do of any substance is going to get blocked on regulatory grounds,” said Cameron Peacock, market analyst at IG Markets in Melbourne.
The decision was only the second time Canada has blocked a foreign takeover since 1985, sparking criticism the minority Conservative government was putting politics before business.
“Some decisions can only be taken once and there is no turning back ever — such as the case today,” Industry Minister Tony Clement said in ruling he was not satisfied about the net benefit to Canada.
Clement said he was unable to release the precise reasons for the decision, which came after strenuous objections from Potash Corp., its home province of Saskatchewan and customers of the crop nutrient essential for boosting crop production.
The decision surprised investors as well as BHP’s executives and advisers. Potash Corp. shares were down some 5 percent in after-the-bell trade while BHP shares rose 2.6 percent to A$43.72, their highest close since April, on expectations BHP would consider returning capital to shareholders.
“BHP not spending all that money on Potash ... will increase the probability of a capital return or share buyback, and people like that possibility,” said Tim Schroeders, a portfolio manager at Pengana Capital.
Potash Corp., which had unsuccessfully sought to attract a rival bid, repeated its view that BHP’s $130-a-share offer was “wholly inadequate.”
Analysts said Potash Corp. shares were unlikely to tumble back to pre-offer levels around $112, given a rising market and strong fundamentals in the fertilizer market. Even without any bid at all, the firm’s shares are expected to rise in the medium term.
While investors expect BHP to look at a share buyback or a special dividend, analysts also said the miner could increase its exposure to oil and gas using an estimated $11 billion warchest.
Shares in Australian oil and gas firm Woodside Petroleum rose 1.8 percent on speculation it could now fall in BHP’s sights, while Oil Search rose 2.9 percent.
China, a major potash user worried about BHP’s influence over supply of another key commodity, welcomed the decision.
“The failure by BHP is good for China ... If we can largely meet our demand with our own supply, the market may not be controlled by one company,” said a senior official at the potash branch of the China Inorganic Salt Industry Association.
BHP launched its bid in August, seeking an entry into the lucrative potash market, 25 percent controlled by Potash Corp. But Potash Corp. stock consistently traded above the offer price, indicating investors thought a higher offer would come.
Under the Investment Canada Act, a foreign takeover must have a net benefit for the country in terms of jobs, exports, production and investment. The Canadian government had previously blocked a foreign takeover only once before.
But this decision had always been a thorny one for a minority government that needed to weigh political considerations against the desire to ensure Canada stayed open for business.
The Conservatives have most of the seats in Saskatchewan, the Prairie province where Potash Corp. is based, and fervent Saskatchewan opposition to the bid meant they risked losing those seats in an election likely to take place next year.
Saskatchewan argued it would lose tax and royalty revenues if the deal went through. It said it would be wrong to let a resource as strategic as potash fall into foreign hands.
“I think it comes as a shock to the market,” said John Stephenson, senior vice president at First Asset Investment Management Inc.
“I think it goes in the face ... of the direction of the government of Canada for the last number of years, which is we’re open for business. Clearly, we’re sending a signal that no, we’re not.”
