Glencore International Plc has learned from BHP Billiton Ltd.’s experiences in handling takeovers in Canada.
Glencore, the largest publicly traded commodity supplier, will probably win Canadian approval for its C$6.1 billion ($6.2 billion) agreement to buy Viterra Inc. because it brought in partners including Calgary-based Agrium Inc. to avoid a repeat of BHP’s failed bid for Potash Corp. of Saskatchewan Inc.
The Glencore deal was done amid concerns that Prime Minister Stephen Harper’s governing Conservatives are wary about foreign ownership of Canadian resource companies. The government rejected a $40 billion hostile bid for Potash Corp. in 2010, saying the proposal for the world’s largest potash miner didn’t provide a “net benefit” for Canada.
Glencore was “thinking that maybe the governments might step in,” Sadiq Adatia, Chief Investment Officer of Sun Life Global Investments in Toronto, which manages about C$9 billion in assets including Viterra shares, said yesterday in an interview. “Adding a little bit of Agrium in there helps out definitely, from that angle.”
Under the Investment Canada Act, the federal government reviews foreign acquisitions of companies with assets valued at more than C$330 million. The C$16.25-a-share offer announced by Baar, Switzerland-based Glencore will also require approval from Canada’s competition bureau, which said yesterday it would be reviewing the proposed transaction.
“If this transaction is subject to review, the test is that it must be of net benefit to Canada,” Agriculture Minister Gerry Ritz said in a statement provided by his office.
Viterra rose 0.1 percent to close at C$15.92 in Toronto. The shares fell 5.5 percent in the 12 months through March 8, the day before the company said it had received expressions of interest.
Viterra, Canada’s largest grain handler, grew out of the Saskatchewan Wheat Pool and other decades-old grower cooperatives in Alberta and Manitoba. In its announcement, Glencore said the company will use Viterra’s head office in Regina as a “platform” for its North American agricultural operations and a potential expansion into the U.S.
Glencore also pledged to make additional investments in Canada and continue with Viterra’s charitable commitments and funding for local institutions.
Saskatchewan Premier Brad Wall, who led opposition to Melbourne-based BHP’s bid for Potash Corp., said that while the Glencore transaction seems to address competition concerns, his government will assess whether the company plans to maintain a “significant” presence in the province.
“A lot of this is based of course on the future intent of this company in the province and exactly what kind of base they want to establish here,” Wall told reporters in Regina yesterday.
Wall said last week Viterra didn’t fit his definition of a “strategic resource” in the same way Potash did. Unlike Viterra, Potash is a dominant player in its industry and holds most of its assets in Saskatchewan.
Bill Johnson, a spokesman for Potash Corp., didn’t respond to phone messages and an e-mail seeking comment yesterday. Fiona Martin, a Melbourne-based spokeswoman for BHP, declined to comment on the company’s failed 2010 bid for Potash Corp.
As part of its deal, Agrium, the largest U.S. agricultural retailer, will acquire about 90 percent of Viterra’s Canadian retail facilities, it said yesterday in a separate statement. It also will buy Viterra’s 34 percent stake in a nitrogen-fertilizer plant in Alberta.
Glencore also agreed to sell assets to Richardson International Ltd., a unit of Winnipeg-based James Richardson & Sons Ltd. The second-largest grain handler in Canada will buy 23 percent of Viterra’s Canadian grain-handling assets as well as other operations in North America. Richardson said it and Glencore-owned Viterra will become “similarly sized” grain-handling companies.
“Anytime a large international player comes in and takes a Canadian bellwether, there is going to be noise, but from a regulatory standpoint this deal has a very good chance of succeeding,” said Steven P. Hansen, a Vancouver-based analyst for Raymond James Ltd. who rates Viterra shares “market perform.” “The deal has been crafted in a very strategic manner, one that appears very intelligent, really looking to appease the broader concerns that have come up in the past.”
Glencore’s decision to involve Agrium and Richardson in the transaction, and to use Regina as regional headquarters for the business, largely mitigates the risk of a blocked transaction, Kenneth Zaslow, a New York-based analyst at BMO Capital Markets, said in a report yesterday.
“This transaction creates value and opportunities for employees, our communities, farmers and customers,” Viterra Chief Executive Officer Mayo Schmidt said in the statement.
Glencore said it didn’t expect any hurdles with the federal-government review process or the competition bureau.
“We will obviously take the process very seriously, we will be very diligent,” Chris Mahoney, Glencore’s director of agricultural products, said yesterday on a conference call. “But we do not expect any problems.”
While Harper has reassured potential investors that Canada remains open to foreign takeovers, saying his rejection of the Potash bid stemmed from unique circumstances, many have become more careful, said Finn Poschmann of the C.D. Howe Institute, a Toronto-based think tank.
‘Subjective and Unpredictable’
Canada’s system for weighing takeovers is “highly subjective and unpredictable,” the C.D. Howe Institute said in a study released in December. The rules may have contributed to the decline in Canada’s share of global foreign-direct investment, it said.
Foreign investors “have become more cautious and more cognizant of the need to play a politically nuanced front game,” Poschmann said in a telephone interview yesterday. They “spend more time than historically to ensure that government stakeholders will be placated and to do so in advance so that the deal has a better chance of approval.”
In a Sept. 21 interview, Harper said that Canada will “proceed with caution” as it considers allowing more foreign takeovers, wanting to ensure they don’t lead to a loss of head office jobs or declining industry leadership, especially as the country competes with jurisdictions that aren’t competing on a “free market” basis.
The federal government passed a law last year that will end the Canadian Wheat Board’s monopoly and give farmers in western Canada the choice to sell wheat and barley to other buyers as of Aug. 1. Farmers have been required by law to sell the grains to the Wheat Board under a system the government created to stabilize prices.
In voting to end the system, Harper argued that an open market will encourage investment and innovation.
Some farmers worry about their profitability as the CWB’s monopoly ends and Glencore enters the market.
“What really troubles me is the concentration of power,” said Ed Sagan, a grower and regional coordinator in Saskatchewan for the National Farmers Union, which opposes ending the CWB’s monopoly. The “wheat board was making us money. The big corporations are going to make money for themselves.”
Concentration of the agri-products retail assets rather than the grain-handling infrastructure is the concern, said Kevin Bender, a farmer in Bentley, Alberta and president of the Western Canadian Wheat Growers Association, which supports the end of the CWB monopoly.
“Viterra provided the competition for Agrium,” Bender said. “With them taking over in a lot of areas, there won’t be a competitor.”
Agrium declined to comment on whether any of its purchase will raise competition barriers.
“In our opinion, retail is a highly competitive market,” Richard Downey, an Agrium spokesman, said by phone. “It’s really still dominated by independents and co-ops.”
Chris Damas, a Barrie, Ontario-based analyst with BCMI Research, said the government will agree to the Glencore deal precisely because it has been promoting competition in the farming sector.
“Because they let the CWB go by the wayside, they are going to have to approve this deal,” Damas said in a telephone interview. “If they really believe they are pro-competition, pro-globalization, they are going to have to approve this deal.”