[miningmx.com] — CANADA blocked BHP Billiton’s $39bn bid for Potash Corp, effectively ending the world’s biggest miner’s plans to buy a new source of growth in fertilizer.
What will BHP, sitting on an estimated $11bn warchest, do now to chase growth?
WILL BHP OFFER MORE CONCESSIONS AND WIN APPROVAL FROM CANADA?
It could, but it is unlikely to offer much more. Its chances of success with the government are slim, considering BHP failed to sway Ottawa with a range of concessions already, including beefing up Potash Corp’s headquarters and investing in infrastructure in its home province of Saskatchewan. CEO Marius Kloppers is not afraid to abandon a takeover if it becomes too costly, as he did in 2008 when he scrapped his dream deal, a full takeover of Rio Tinto. So he could easily do the same again.
Canada has given BHP a month to come up with extra concessions, an extension required under Canadian law. However, Canadian Industry Minister Tony Clement’s statement made clear there was little leeway for him to reverse his decision.
IS BHP BECOMING TOO BIG TO CHASE MAJOR DEALS?
It’s starting to look that way. Canada’s decision is the third political or regulatory obstacle BHP has run into chasing a major deal in three years. It abandoned its $116bn iron ore joint venture with Rio Tinto a month ago following objections from regulators, and two years ago European watchdogs expressed concerns about its bid for all of Rio Tinto.
Any acquisition the $224bn company makes has to be huge to make a difference to its growth prospects. Any deal that size is bound to raise alarm bells globally.
“It is so big and it takes big deals to move the needle,” said Michael Bentley, a portfolio manager at Northward Capital. “The regulatory side of things is becoming a big issue for them.”
Even if the Potash Corp bid had been allowed by Canada, China, a big customer of BHP and Potash Corp, could have weighed in to oppose the deal.
“Clearly it’s pretty hard for them to keep growing from here,” said Peter Chilton, investment analyst at Constellation Capital Management, which owns BHP shares.
WHAT AVENUES CAN BHP PURSUE FOR GROWTH?
Oil and gas companies may be the best target on the acquisition front where it could avoid regulatory obstacles, as BHP is nowhere near as big as the majors in the sector. “They’ve run out of options in most other spots, so they’ve got to look at oil and gas,” said Bentley.
BHP senior executives have said they are looking for oil and gas acquisitions, and even said the Potash deal would not stop them from continuing to scout around in that sector. Shares in Australia’s biggest independent oil and gas producer Woodside Petroleum and Papua New Guinea’s Oil Search jumped on speculation they could be on BHP’s radar.
The company also has a multi-billion dollar pipeline of growth projects, including the 8 million metric ton Jansen potash project on the drawing board in Saskatchewan, and expansions in iron ore, copper and uranium in Australia.
WILL BHP POUR ITS CASH INTO SHARE BUYBACKS?
The company is under pressure from some investors, including its biggest shareholder, BlackRock, to resume share buybacks which it put on hold in 2007. They say it would be the quickest way to boost value for shareholders.
“Buybacks are always good,” said James Holt, investment specialist at BlackRock. “If they dropped the bid and have all this extra cash on their hands and make a strong announcement what they’re going to do with all their cash, you could see (BHP shares) rally quite a bit.”
With gearing of around 6%, it could go ahead with borrowing the $40bn it lined up for the Potash bid and hand the cash to shareholders. However, Kloppers has repeatedly said his priorities are to invest in projects or acquisitions ahead of returning cash to shareholders, so a buyback might not happen anytime soon.