A successful takeover of Saskatoon-based PotashCorp could slash the province's revenues by at least $2 billion over the next decade while having little or no net effect on employment, according to a report commissioned by the province.
The Conference Board of Canada report, released Monday, seemed to indicate that there will be little short-term benefit to Canada if international mining giant BHP Billiton is successful in its hostile bid for PotashCorp (TSX:POT).
The Saskatchewan government will consider the report's findings before it provides its views on the US$38.6-billion takeover offer to Ottawa. Under the Investment Canada Act, the federal government needs to determine if the bid is of net benefit to Canada before it can be approved.
Bill Boyd, Saskatchewan's minister of energy and resources, said the report confirms many of the concerns the province has about the takeover bid. Premier Brad Wall has said he in the past he doesn't see how a BHP-controlled PotashCorp would benefit Canada.
"I think this report confirms that there certainly are some very significant risks for the province of Saskatchewan," Boyd said in an interview Monday.
"There are some benefits as well, but there are very significant risks, losses of hundreds of millions of dollars in terms of corporate tax and similar amounts in terms of royalties," Boyd said.
He added that the province will take some time to review the report before issuing its recommendation to Ottawa.
"We will likely have further discussions with some of the industry players and, at a later date, probably this month, we will be responding in a more formal way, both to the people of Saskatchewan and to the federal government process," Boyd said.
A successful takeover would cut the province's revenues by about C$200 million a year over 10 years, or about two per cent, the report said.
This is because BHP would be able to take advantage of favourable tax preferences. For example, acquiring an existing operation in the province would allow the company to write off the capital cost of its Jansen potash project, currently under development, against income generated by PotashCorp's properties.
BHP has come under fire for musing about pulling out of Canpotex -- a potash marketing company jointly owned by PotashCorp, Agrium Inc. (TSX:AGU), and Mosaic Co. (NYSE:MOS) -- a move that could lower prices for the mineral used in fertilizer and therefore take a bite out of Saskatchewan's royalty revenues.
However, even if BHP were to remain in Canpotex, "Saskatchewan's tax yield from the potash industry would be temporarily lowered, due to the nature of the current tax and royalty regime," the report said.
And, in the worst-case scenario, a takeover that resulted in higher volumes and lower prices for potash could take an even bigger bite out of provincial revenues -- as much as $5.7 billion in taxes and royalties over the next decade.
However, this is more likely to happen under a Chinese-led takeover bid -- considered a likely alternative -- than under a successful BHP bid.
Boyd said the potential loss of revenue to the province is worrisome because changes to the royalty structure to offset the loss could have negative effects on other potash companies and the industry as a whole.
Meanwhile, most of the job creation from the development of Jansen isn't expected for a minimum of 16 years, and the province is unlikely to see any short-term employment benefits from a BHP takeover, the report added.
If the BHP bid is approved, the province should insist on two conditions: that the global headquarters of the company's potash business be located in Saskatchewan -- a promise BHP has already made -- and that the CEO and other senior executives with the potash business be required to live in the province, the report recommended.
PotashCorp has said BHP's US$130-per-share bid undervalues the company. CEO Bill Doyle has predicted that other bidders will come forward but so far no white knight has emerged to challenge BHP. There have been unconfirmed reports that Doyle and other PotashCorp executives are attempting to put together a management-led buyout with backing from strategic investors in China and financial investors from pension funds elsewhere.
BHP's bid still requires government and regulatory approvals.
PotashCorp is suing the company in a U.S. court for allegedly misleading investors on the key facts of its takeover bid, but BHP has asked the court to throw out the case.
Shares in Potash Corp. of Saskatchewan were up $2.71 or just under two per cent at C$147.75 Monday afternoon on the Toronto Stock Exchange.
