Go like the Kloppers

BHP: BHP Billiton’s withdrawal of its $39 billion offer for Potash Corp is as smart as Canada’s rejection of it was dumb. Marius Kloppers, BHP’s boss, should emerge from the debacle relatively unscathed.

Kloppers has now flunked three big deals. An all-share merger with rival Rio Tinto was sunk by the financial crisis, and a later joint venture with Rio was scuppered by antitrust regulators. Now his opportunistic Potash bid has fallen because Canada’s Ministry of Industry felt it offered no “net benefit” for the country.

Yet in this case, BHP could not obviously have done much more. It offered a large bag of goodies, including pledges to increase employment and pop Canadians onto its board, as well as offering to defer perfectly routine tax benefits. Further concessions would have cost BHP valuable flexibility – and left other resource-rich governments salivating at the precedent.

True, it didn’t help that Potash’s board was set against the takeover. Its directors argued that the $130-a-share cash offer was far too low, and so had no inclination to increase the pressure on politicians. But with the deal already set to return a meagre 5 percent in the first year after tax - just half of BHP’s weighted average cost of capital - a higher bid might have destroyed value for its shareholders. The sector’s last consummated mega-deal, Rio Tinto’s bid for Canada’s Alcan, proved an expensive mis-step.

BHP’s shares have not suffered. The stock fell almost 5 percent when the bid was announced, but has since stayed in lockstep with rival Rio Tinto. The few-cents fall in the shares on November 15 was a little more than the $0.06 per share that the company will register in costs for the aborted deal. A $4.2 billion share buyback, likely to be enlarged in coming weeks, should placate investors further.

While that justifies Kloppers’ strategy, the same cannot be said for Canada’s. The country depends more than most on openness. Its foreign direct investment is persistently higher as a share of GDP than the rest of the G7, and Canadians have bought $100 billion more foreign companies than they have sold in the last decade, according to Thomson Reuters data. By objecting to BHP’s offer, Canada has ensured that it suffers the greater embarrassment.