Harper’s Pro-Trade Stance, Investment May Suffer From BHP Ruling

The Canadian government’s rejection of BHP Billiton Ltd.’s $40 billion bid for Potash Corp. of Saskatchewan Inc. may hurt the country’s pro-trade image, deter foreign investors and penalize companies investing overseas.

Canada blocked the bid by BHP, the world’s largest mining company, because the proposed takeover doesn’t provide a “net benefit” to Canada, Industry Minister Tony Clement said in a statement yesterday. BHP has 30 days to appeal, he said, without giving more reasons for his ruling. The transaction would have been the second-biggest acquisition in the country’s history.

“When companies look at Canada, there’ll be a bit of a premium put on the cost of capital,” said Jack Mintz, an economist and public policy expert at the University of Calgary. “There’ll be a chill on takeovers of Canadian companies.”

Prime Minister Stephen Harper has campaigned for Group of 20 countries to resist protectionism and earlier this year abolished all tariffs on imported machinery and equipment. Foreign direct investment in Canada has more than doubled in the last 10 years, reaching C$549 billion in 2009, government statistics show.

After the BHP rejection, Harper may find it more difficult to convince lawmakers in the U.S., Canada’s largest trading partner, or in emerging countries to give domestic companies fair treatment.

The rejection “could be used down the road when a Canadian company tries to buy a major acquisition in another country,” Mintz said before the ruling. “You never know when the consequences are going to come back at you.”


Since Harper first became prime minister in 2006, foreigners have spent $367 billion to acquire 2,391 Canadian companies, while Canadian businesses have spent $310 billion to buy 2,866 foreign firms, Bloomberg data shows.

Among Canadian acquisitions in the past decade, Thomson Corp. bought Reuters Group Plc of the U.K. for $18.2 billion in 2007 and Manulife Financial Corp. acquired John Hancock Financial Services Inc. of Boston for $10.9 billion in 2003.

“I am passionately patriotic,” Chris Damas, a Barrie, Ontario-based equities analyst with BCMI Research, said in an e-mail. “But I don’t believe we should be running to the federal government for protection when someone comes trying to buy our biggest companies.”

Under the Investment Canada Act, the government can block any transaction valued at C$299 million ($291 million) or more if it finds it doesn’t provide a “net benefit” to the country, based on factors such as output and employment levels.

“Canada has a long-standing reputation for welcoming foreign investment,” Clement said yesterday. “The government of Canada remains committed to maintaining an open climate for investment.”

‘A Second Look’

“I think it will cause companies to take a second look,” said Ian Nakamoto, director of research at MacDougall MacDougall and MacTier Inc. in Toronto, which manages about C$4 billion in assets, including Potash shares. “If the commodities sector continues to be in favor, I think they will come in. But in terms of acquisitions of big companies, it’s very unlikely. People will say, ‘Look what happened to BHP.’”

Opposition lawmakers have said that Canada risks suffering a “hollowing out” when foreigners buy large corporations, because head-office-related jobs vanish. Studies have shown that concern to be baseless, said Walid Hejazi, professor of international competitiveness at Rotman School of Management in Toronto.

“The idea that a foreign company is going to come into Canada and gut it, it’s not true,” Hejazi said. “There’s no evidence to support it. They’re going to continue to operate the company in a way that maximizes its value.”

One Rejection

In the past 25 years, Canada has approved more than 1,600 bids while formally rejecting only one takeover offer until yesterday. Alliant Techsystems Inc.’s bid for MacDonald Dettwiler & Associates Ltd.’s space business was blocked in 2008.

“People are critical of Canada for being a boy scout when it comes to those things,” said Bill Robson, president of the Toronto-based policy research group C.D. Howe Institute. “It’s good to be a boy scout, because the way you treat investors generally is going to affect the economic climate within the country.”

If investors believe the decision was taken arbitrarily, “it’s going to have a depressing effect on Canadian asset prices,” Robson said before the decision was announced.

Provinces Opposed

Saskatchewan is home to the world’s largest reserves of potash, a form of potassium farmers use to boost crop yields. Saskatoon-based Potash Corp. is the world’s largest maker of potash by capacity. The province’s premier, Brad Wall, said Canada’s rejection of the bid from Melbourne-based BHP was justified because potash is “a very strategic resource.” Wall, an ally of Harper, also rallied support from other provinces including Quebec and Alberta to oppose the sale.

“If you walk away from a proposition like this you are starting to send a signal that you’re not open for business,” Andrew Mackenzie, BHP’s head of non-ferrous businesses, said in an Oct. 22 interview. A rejection “will make it harder in the future to attract capital both into Saskatchewan and Canada and you will make it harder for Canadian companies to invest overseas.”

Canadian firms that have invested in Australia include the Ontario Teachers’ Pension Plan and the Canada Pension Plan Investment Board, which agreed in August to buy Intoll Group for A$3.44 billion ($3 billion) to gain stakes in toll roads in Toronto and Sydney.

Christopher Sands, a senior at the Hudson Institute in Washington, said Canada may lose its credibility with emerging countries.

“Canada will just be another commodity exporter that intervenes when it sees some political advantage in doing so,” he said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE