Late last week, the drama surrounding the Potash takeover from BHP Bhilliton finally reached a conclusion as the Canadian Government said no to the deal. The primary reason given was that Potash was too valuable of a resource to be owned by foreigners, even friendly ones headquartered in Australia. Surprisingly, Potash stock only sold off a couple of percent with the move. Seemingly the market is expecting BHP to either find a way to make the government happy or they expect another bid from someone not so foreign.
I expressed my disappointment about the Government’s decision that day on Twitter. I believe, like most investors, that Government intervention in business is generally bad. I understand implementing regulations to keep working conditions and competition fair, but I feel that this decision goes too far. Easily the best quote I’ve read on the topic came from Saj Karsan’s Twitter, the author of the Barel Karsan value investing blog. Take it away Saj:
Freedom/capitialism/productivity all take a hit when the government prevents you from willingly selling your company to a willing buyer. $POT
I absolutely love that quote. First, a little Potash history lesson before we move on.
The Government of Saskatchewan owned Potash until 1990. It was one of those crown corporations that I hate so much. The government made the decision to privatize the company, transferring ownership from themselves to shareholders. By buying the company, shareholders gained the right to share in future profit’s the company made, along with the final say on important company matters- like acquisitions and mergers. All of this stuff is pretty basic shareholder rights.
Then BHP came along and made an offer. The offer was all the financial news could talk about at the time. While it was a large premium, rumblings were that Potash was still undervalued. The stock shot above the price; the market was pricing in a competing bid. As the months played on, no competing bid came. The deal was set to close, it just needed federal government approval.
In the meantime, Saskatchewan Premier Brad Wall decided he had himself a cause worth fighting for in opposing the acquisition. He believed the asset too valuable to lose. He warned of “economic consequences” for both the people of Saskatchewan and Canada. Jobs and tax revenues would leave the province he argued, conveniently leaving out the fact that the company has had its headquarters in Chicago for years now. He even threatened to sue the feds if they allowed the sale to go through.
The people of Saskatchewan agreed with Wall. One report increased his approval rating almost 7%, claiming that over 80% of the residents of the province agreed with the stand. One has to wonder just how much of this battle was politically motivated.
If the resource was really so important to the people of Saskatchewan, why was it privatized in the first place? The resource still remains under the ground in the province, no amount of wheeling and dealing by BHP can change that. BHP would still have to pay the government royalty fees for every ton of potash removed from the ground. Citizens of Saskatchewan would still be hired to mine it. They would still, in turn, spend that money in the province. BHP would still have to pay Canadian income tax on their profits there. I don’t understand where the economic argument comes into play.
Brad Wall, Stephen Harper or anyone else in government doesn’t own the resource. Potash does, and it is owned by shareholders. One of the tenets of free markets is that a company can come along and buy another company. And with the exception of the newly formed company forming a monopoly, nothing should stand in the way of that. If the resource is really so important, then maybe the Canadian or Saskatchewan government should make a run at the company. Naturally, shareholders should be properly compensated.
Ultimately, all property is owned by the government and the government reserves the right to step in and block a transaction transferring property. It makes sense for the government to have the final say in situations like this. But the government needs to be very careful in using that power. Property rights are one of the most important freedoms we have in this country. A well defined set of property rights is one of the things that separates the developed world from the developing world. Nobody here lives in fear of the government taking their land.
This decision could be the beginning of a slippery slope. For the sake of business in this country, I hope this is an isolated incident.