BHP Buyout Offer Confused Potash Corp. Investors, CEO Testifies

BHP Billiton Ltd.’s hostile bid for Potash Corp. of Saskatchewan Inc. has confused the fertilizer producer’s investors “since day one,” the Canadian company’s chief executive officer told a U.S. judge.

CEO Bill Doyle was the first witness in a federal court hearing in Chicago yesterday in which Potash Corp., the world’s largest producer of fertilizer, seeks an order blocking BHP’s $40 billion takeover plan.

The hearing came a day after the Canadian government said BHP’s $130-a-share buyout wouldn’t provide a “net benefit” to Canada and stopped the sale, giving BHP 30 days to appeal. U.S. District Judge David H. Coar in Chicago allowed the hearing to go forward while Melbourne-based BHP seeks to overturn the Canadian decision.

BHP, the world’s biggest mining company, has denied Saskatoon-based Potash Corp.’s allegations that it made misleading public statements about plans to develop a rival potash mine near Jansen, Saskatchewan, and asked Coar to dismiss the case. BHP said it has complied with U.S. disclosure requirements and that investors, not the courts, should resolve the dispute.

Saskatchewan’s provincial government opposes the transaction, saying it would cost the province jobs and tax revenue.

Potash Reserves

About 93 percent of the world’s potash production is dedicated to creating water-soluble potassium fertilizer, and about 80 percent of the world’s reserves are in Russia, Belarus and Canada.

With a projected production capacity of 8 million tons a year by 2025, the Jansen mine, if completed, would be the largest single source of the potassium-based mineral. Potash Corp.’s six mines produce about 12 million tons a year, Doyle said.

Potash Corp. has suggested that BHP is using the threat of the mine to drive down Potash Corp.’s share price.

Doyle called the scale of the Jansen plan “illogical” because there isn’t demand for so much potash. He said Jansen, as described, “made no economic sense” because it would cost as much as $10 billion to develop and would flood the market, depressing the mineral’s price.

“I would say our shareholders have been confused since day one,” about BHP’s intentions, Doyle told Thomas Moloney, an attorney for the Australian company during cross-examination. “I think it’s a smoke screen.”

BHP Chief

Andrew Mackenzie, BHP’s chief for the unit that produces diamonds, coal, aluminum and potash, testified that his company was fully behind the project.

Mackenzie recounted for Coar how his company had started acquiring land for potash production, first in joint ventures with companies in Manitoba and Saskatchewan in 2006, then by acquiring Saskatchewan’s Anglo Potash Ltd. and with it the Jansen lands in 2008.

“The strategy has always been build and buy, not one or the other, Mackenzie told Potash Corp. attorney Daniel Reidy under cross-examination.

Reidy confronted the BHP executive with copies of intra- company e-mail messages showing that CEO Marius Kloppers questioned the cost of the mine plans and that the company had scaled down the project so that the initial production goal was only 2 million tons a year, with provisions for first doubling production capacity, then doubling it again.

‘Normal Debate’

“This is normal debate between a CEO and his direct reports,” Mackenzie said. “We challenge each other.”

Doyle told the court of an Aug. 12 meeting with Kloppers at the Four Seasons hotel in Chicago at which the BHP CEO first related the plan to acquire a controlling interest in Potash Corp. for $130 a share and gave the Canadian company four days to respond.

“It was a totally unacceptable offer,” Doyle said.

Moloney confronted Doyle about statements he has made about the worldwide need to develop new sources of Potash by about 2020.

The timeframe was only an approximation, Doyle replied. “It’s very hard to predict the future,” he said. Creating new mines is less costly if the developer can make use of existing infrastructure, he said.

“BHP is the largest mining company in the world,” Moloney reminded the CEO.

“They are, but they’re not in the potash business,” Doyle replied.

Two economists, testifying for BHP, said the alleged misstatements had had no demonstrable effect on the price of Potash stock.

Coar said will hear final arguments on Nov. 8.

The case is Potash Corp. of Saskatchewan Inc. v. BHP Billiton Ltd., 10-cv-06024, U.S. District Court, Northern District of Illinois (Chicago).

To contact the reporter on this story: Andrew M. Harris in Chicago at aharris16@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

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