BHP's Potash bid faces pressure from Canadian province

BHP Billiton is looking to address Canadian concerns about lost revenue from its takeover bid for Potash Corp after Saskatchewan province said it would not back the miner's $39 billion bid.

An official with the Canadian province said BHP had failed to meet demands necessary to win Saskatchewan's backing of BHP's hostile takeover, possibly leading Canada to scupper the deal.

BHP, the world's biggest miner, offered Saskatchewan a fraction of the C$3 billion ($2.9bn) over 10 years that the province is seeking to make up for expected revenue losses, the government officil said on Tuesday, causing talks to break down.

Saskatchewan will now give the bid an unfavourable review later this week, a source familiar with the matter said, possibly leading to the Canadian government quashing the deal.

However, BHP said it was confident about addressing the tax-loss concerns and was working with the Canadian government's Investment Review Division (IRD) on making additional "significant" undertakings to get a deal across the line. "BHP Billiton is confident it can address this concern and, in this regard, is prepared to make commitments which go beyond the requirements of prevailing Canadian legislation that should effectively address the tax loss concerns of the province," the miner said in a statement.

Saskatchewan, where Potash Corp, the world's top fertilizer producer is based, will play a key advisory role as the Canadian government decides whether to approve BHP's bid, or any other that may emerge, on the basis of whether it offers a net benefit to the country.

Potash has flatly rejected BHP's $130 per share offer and has repeatedly said it expects other offers. Potash shares remain above the offer price, suggesting that investors expect a sweetened bid.

"At the heart of any 'net benefit' calculation is the people of Saskatchewan being compensated for the C$3bn in revenue Saskatchewan will lose over the next 10 years as a result of a BHP Billiton takeover of Potash Corp," the official said. "This would need to happen before we would even consider supporting the deal."

BHP offered a C$370 million one-time payment into an infrastructure fund, the government statement said, adding it "doesn't even come close to offsetting the province's revenue loss." Saskatchewan has not talked with BHP about a special tax, the statement said.

BHP said the tax concerns were mainly due to tax deferrals which were permitted under Canadian laws, adding it could make commitments beyond those laws to address the issue.

A source familiar with the deal said BHP had expected the opposition and did not regard it as likely to become a deal-breaker as Saskatchewan did not have the final say.

"I don't think this is seen as a fatal flaw," the source, who was not authorised to speak to the media, said.

BHP said it has been in talks with the Canadian federal government to address worries. A report by the Conference Board of Canada and commissioned by Saskatchewan said on Oct. 8 that a BHP takeover was preferable to a takeover by a state-owned Chinese entity.

BHP's Sydney-listed shares were trading 1.0 per cent weaker at 0317 GMT, outperforming other miners such as Rio Tinto which investors said reflected the possibility a deal could fall through.

"If there's any whiff that the deal's less likely, then the stock rallies quite hard," said one fund manager in Sydney who declined to be named as his fund owns BHP shares.

"As a shareholder in BHP I'd be happy for them to be hard-nosed. If they've stuck to their guns and said this is what we're prepared to pay and the government is not happy with it, then so be it."

Earlier this month, a report for the Saskatchewan government said BHP's bid could cost the province as much as C$5.7bn ($5.5bn) under current tax rules if BHP acquires Potash, maximises production and develops its own Jansen project in Saskatchewan.

The cost of building the Jansen potash mine, which would be the world's biggest, could offset taxes that existing Potash Corp mines pay to Saskatchewan.

"The position of the government of Saskatchewan is unchanged," the statement said. "...We will protect the economic and strategic interests of the people of Saskatchewan."

Saskatchewan Premier Brad Wall will speak on the bid on Thursday in the provincial capital of Regina.

Despite BHP's confidence, a Canadian-based lawyer said it was important to keep Saskatchewan on side.

"The provincial response will certainly be highly persuasive at the federal response level," said Darryl Levitt, a Toronto lawyer at Macleod Dixon who is not involved in the deal.

"It would be important for BHP to get the initial support of the Saskatchewan government as this will stand it on solid ground at the federal approval level."

BHP may still be under pressure to make concessions to Saskatchewan, Levitt said, possibly including a "golden share" that would give the province authority over how the company operates in Saskatchewan.

Canada's federal government has said it will consider Saskatchewan's views carefully as it determines if the bid is of net benefit to Canada, the litmus test for approval under the Investment Canada Act. Ottawa's deadline for its review is November 3.