Analysis: Potash dents, not ruins Canada’s pro-business rep

By Jeffrey Hodgson

TORONTO (BestGrowthStock) – Canada’s surprise decision to block BHP Billiton’s $39 billion hostile bid for Potash Corp will curb foreign investment and lower the odds of successful offers for resource giants like Suncor Energy Inc.

But fund managers and analysts said the fallout will affect just a few major companies, and Canada remains mostly “open for business”. The deal’s rejection could also prompt much needed clarity to existing rules on foreign investment.

“It will discourage foreign companies taking a run at … large strategic assets, of which I think there’s only a handful,” said Gary Baker, leader of the research team covering Canadian equities at Connor, Clark & Lunn Investment Management in Vancouver.

“It would make it hard for someone to take over Suncor … but I think the government’s been fairly open. There’s been a lot of transactions, including the Chinese, coming into Canada buying smaller metals, oil and gas companies.”

Wednesday’s government decision to spurn BHP triggered an angry response from financial markets. Potash shares slid and the Canadian dollar slumped briefly.

“Now foreign companies will be a bit more cautious on taking over some Canadian corporations. That could affect the inflows coming to Canada,” said Charles St-Arnaud, currency strategist at Nomura International in New York.

“The economic decision would have been to approve and probably put some conditions on the deal. But the refusal was thoroughly for political reasons.”

St-Arnaud did not see the move signaling a new wave of protectionism by Canada, but he said international investors may see it that way. The Canadian dollar can still appreciate in this environment, but it has lost one of its “tailwinds”.

Canada’s dollar actually hit a three-week high on Thursday, nudging close to parity with the greenback. Canadian stocks hit their highest levels since September 2008 as commodity prices surged.


Since Canada began reviewing foreign acquisitions of Canadian companies under a 1985 law, it has approved more than 1,600 and rejected just two, including the offer for Potash.

This included a stretch during the commodity boom before the financial crisis when nickel producers Falconbridge and Inco and aluminum giant Alcan were sold to foreign investors.

“It’s not going to stop people if they want to acquire a property out there from going after it, because they have 3 chances in 1,600 of not getting it through,” said Don Reed, a fund manager and chief executive of the Canadian subsidiary of Franklin Templeton Investments.

“Don’t forget, Inco and Alcan went through, and those are major players.”

Fund managers said investors will now ask if big energy firms like Canadian Natural Resources and EnCana Corp or BlackBerry maker Research In Motion would be deemed strategic.

Fears that these companies may be takeover proof could cause investors to discount their shares slightly, said Bob Gorman, chief portfolio strategist at TD Waterhouse, and this could prompt Ottawa to define more closely what a “strategic asset” is.

“What will come out of this is an attempt to try and lend greater clarity to the definition. To the extent they can do that, that may minimize such a discount or it might confirm it,” he said.

Canada’s left-leaning New Democrats on Thursday introduced a nonbinding motion in Parliament to amend the Investment Canada Act and make the foreign investment review process more transparent.

(Editing by Janet Guttsman)

Analysis: Potash dents, not ruins Canada’s pro-business rep